Surrounding the chocolates, roses and love-filled greeting cards that made the rounds in Washington on Valentine’s Day, was an announcement from Rep. Ed Royce (R-Calif.) re-introducing a bill that would increase the member business lending cap from 12.25% of assets to 27.5%.
And the fight to expand lending authority heads back to the battlefield as bank trade groups stock their quivers with more arrows in hopes of emerging victorious in a battle that has waged on for at least a decade.
But how much of a fight is it? Especially in light of the fact that most credit unions are nowhere near their MBL caps and an edict from the NCUA last August that allows more than 1,000 credit unions to become a low-income designated credit union, which would exempt them from the cap.
“When we talk about those credit unions that are up against the cap, we’re only talking about a few, less than 5%,” said Harvey Johnson, CPA and senior manager with PBMares LLP, a regional accounting and consulting firm based in Newport News, Va. “I think there’s two things going on. For smaller institutions, the NCUA issued the low-income designation, which gave them unlimited authority and others that have started using participations to manage the cap.”
As long as the expertise is there, Johnson said he is a big fan of participation loans. It’s the credit unions that lack the experience that tend to get themselves in trouble, he added.
Those type of cooperatives tend to the run the gamut but for the larger credit unions, the MBL cap may not be as big of a concern because their cap limits are so far off in the horizon, said William McCluskey, CEO of Willow Capital Group, a firm in Centerbrook, Conn., that provides commercial loan origination, underwriting and closing for more than 30 credit unions, managing a servicing portfolio of nearly $330 million.
“The bigger issue is to attract quality loans, and there’s pressure to put balances on the books, coupled with the fact of building a program,” McCluskey said.
He pointed to one large credit union client that is 47% loaned out and has between $500 million to $1 billion in capacity. However, in order to fill that space, McCluskey said the fuel has to come from wanting to invest in the loan program and other factors, including justifying to the board that the credit union has income coming in.
Still, McCluskey can see both sides for raising and keeping the MBL cap where it is.
“There needs to be some outlet to letting a credit union not having to abide by the 12.25% arbitrary cap,” he offered. “On the flip side, I’m concerned that if the cap is raised, there are many credit unions that are looking to enter the market. They might go out and grab any loans and lose sight of building quality programs.”
McCluskey pointed to another instance of a credit union that has been a longtime proponent of raising the MBL cap. After building a successful program over the past 15 years, the cooperative had built a reputation in its market, he said.
“They’re under a lot of pressure because they can’t serve their community, and they can’t help grow the community this way,” McCluskey pointed out.
As the cap fight in Washington begins another round, market conditions will often determine whether credit unions will hum along as usual, scale back or delay getting into commercial or business lending programs this year, McCluskey said. For instance, in states like New York, where bank saturation is heavy, credit unions are facing stiff competition, he said. In other parts of the country, banks might not be as big of a concern. And for those that are already flush in auto, mortgages and home equity loans, there might not be a need to turn to business loans to add to the bottom line.
“We focus on commercial real estate. It’s a slow moving animal. We counsel credit unions that if they get into this type of lending, they need to mirror their communities,” McCluskey said. “One of the pressures of those who are trying to build balances is knowing local lenders.”
By targeting loans under $1 million, which are considered small balances to many credit union competitors, and partnering with agencies such as the SBA, McCluskey said some can get a feel for how they can best serve small businesses.
Knowing the markets and who they’re competing with is just as important if not more important than where the MBL cap lift will go.
“One thing that’s different about 2013 is credit unions face not only the limitation cap but also more money coming back into the market,” said David Polevoy, executive vice president of commercial lending for Credit Union Business Services LLC, a Norcross, Ga.-based commercial mortgage lending firm owned by six Georgia credit unions.
“A lot of credit unions would like a level playing field, particularly as more lenders come out in the marketplace,” Polevoy said. “It’s somewhat of an indication of a healthier economy. But credit unions have been out there throughout the cycle, have been generally conservative and have relatively good quality loans and didn’t have to pull back like other lenders did.”
Since 2003, CUBS has originated in excess of $250 million in commercial property and commercial mortgage loans in the Atlanta area and throughout Georgia as well as properties in Alabama and Tennessee, according to the CUSO’s website. This year, it plans to coordinate the funding of over $50 million in business and commercial property loans.
Polevoy believes the NCUA’s low-income designation and to a smaller degree, signing on with the SBA’s 7(a) loan program, are a few ways credit unions will manager under their caps.
“Credit unions are experiencing asset growth. As assets expand, business lending expands,” Polevoy said. “Certainly, there’s no interest in pulling back. I think more and more credit unions have looked at the commercial market and said, ‘Here’s an opportunity to have good credit and diversified assets.’”
Well-capitalized credit unions that can show they have established a strong MBL program should be allowed to press beyond the 12.25% cap, McCluskey said. They should be given flexibility to originate loans with limited or nonpersonal recourse, provided the structures of these loans are within accepted industry norms, he added. Nonrecourse loans for instance, are generally collared at much more conservative leverage points or loan-to-value and are reserved for the highest quality real estate assets, which should effectively mitigate the risk of the loan investment, he explained.
For those credit unions that do not have an established program or that demonstrate inconsistent results, such as higher than normal loan losses or delinquencies, regulations should serve as an effective guideline for prudent program creation and growth, McCluskey said.
“Increased capacity above 12.25% may provide a credit union inappropriate justification to build a program deemed feasible due to its potential size, but it cannot replace measured and disciplined growth, which focuses on quality performance,” McCluskey said. “In other words, credit unions that exhibit risky behavior or nonuniform execution of their programs, may not even be justified in a 12.25% let alone a higher cap.”
For Business Lending Group LLC in Appleton, Wis., three of its four credit union clients are exempt from the MBL cap, said Linda Kennedy, president/CEO of the CUSO. The fourth credit union still has plenty of room to grow towards its cap, she noted.
“I haven’t seen a lot of new credit unions in Wisconsin getting into business lending,” Kennedy said. “Still, I hope Congress looks at increasing the cap. There are a lot of small businesses that need a credit union environment. Big banks don’t want to do deal with small credit. There are a lot of people that fall into that underserved market.”
In the current lending environment when loans are hard to generate, there’s an uptick in interest in member loans and nonmember participation loans, especially from credit unions in the $100 million to $250 million asset range, said Bill Beardsley, president of Michigan Business Connection LC, a CUSO in Ann Arbor that manages over $200 million in business loans for more than two dozen credit unions.
“I don’t think there’s any doubt that the cap discourages smaller credit unions from launching MBL programs because it limits the loans they can make,” Beardsley said.