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<p>More and more credit unions seem to be interested these days in lending to small businesses. That is not surprising. As Mike Welch rightly pointed out in his column last week (CU Times, May 1), lending to small businesses has been an integral part of many credit unions’ activities from the earliest days of credit unions in the United States. After all, the Federal Credit Union Act as originally passed in 1934 – and as it still reads today -exhorts credit unions to “creat[e] a source of credit for.productive purposes.” And credit union member business loans have generally been targeted toward the smaller end of the business loan market – loans under $100,000. That is the market segment that tends to be most underserved by other financial institutions, so there is a definite need that must be addressed. One might expect that the U.S. Small Business Administration (SBA) would be credit unions’ natural partner in reaching this market. The market for loans under $100,000 has always been difficult for SBA to reach, and the law creating the SBA obligates that agency to promote the formation and continued success of small businesses by making credit available to them as widely as possible. SBA’s loan guarantee program (known as the “7(a) Program”) helps lenders provide credit to small enterprises by providing financial institutions with a safeguard against losses on what might otherwise be marginal loans. Unfortunately, the achievement of the common goals of SBA and credit unions has been frustrated for some years. The culprit is not a new directive from Congress or a new regulation from SBA, but an unfounded interpretation of an SBA regulation by the agency’s Office of General Counsel. To ensure that unlawful discrimination is kept out of its programs, SBA requires that lenders participating in its programs be “open to the public.” The question is how this standard should be applied to credit unions that, by definition, have limited fields of membership. For decades, SBA’s lawyers recognized that credit unions fully serving limited fields of membership were “open to the public.” At some point, however, this opinion was reversed, without explanation or public comment of any kind. SBA’s current position is that only geographically-based credit unions (those with community charters or with a low-income community within their fields of membership) are eligible for the 7(a) program. The bad news is that this interpretation effectively excludes a large majority of credit unions from the 7(a) program. An estimated 11.6% of credit unions are community-chartered. The good news is that, just as SBA adopted its current interpretation without legislation, it can return to its previous (and, in our view, more correct) interpretation without legislation. Compared with legislation, regulation is a highly efficient process for getting something done-provided that the agency has the will to pursue it to correct a problem. In March, 2002, CUNA submitted a detailed legal analysis to SBA, demonstrating the errors in SBA’s current interpretation, the correctness of its earlier interpretation, and the tendency of the current one to keep both SBA and credit unions from achieving the missions given them by Congress. CUNA has met with SBA Administrator Hector Barreto and convinced him to speak at this year’s Governmental Affairs Conference. Senior SBA officials recently took part at CUNA’s Small Business Summit meeting. SBA now says that it is actively reviewing the matter, and will soon announce a course of action. No one knows why SBA largely closed its doors to credit unions after having left them open for a long time. Could lobbying by the banking industry have had something to do with it? That is impossible to tell without public notice and comment on the change. Certainly, the banking industry will strongly oppose any liberalization of SBA’s policy toward credit unions, and it is never easy for a agency to risk alienating an important part of its constituency. But in the end, SBA must do what the law says its must do: make credit as widely available as possible to small businesses. That objective will never be achieved without the active participation of credit unions. Therefore, what SBA must do is clear. SBA must rule that credit unions fully serving their lawful fields of membership are “open to the public” for purposes of the 7(a) eligibility requirements. Of course, credit unions are subject to the same federal anti-discrimination laws as all other financial institutions. In addition, the Credit Union Membership Access Act has made it clear that new groups may be brought into existing federal credit unions in many ways; similar or even greater flexibility is provided under many state laws. To say that credit unions are not open to the public in these circumstances is simply nonsensical. In the weeks ahead, we will be pressing this point with SBA and with Congress. With a little effort, the unjust exclusion of credit unions from the 7(a) program will, we hope, soon come to an end.</p>

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