The Obama administration put its support behind raising the cap on member business loans to as much as 27.5% assets in writing, but credit unions may have to wait a while before they start booking more loans.
Treasury Secretary Timothy Geithner wrote House Financial Services Committee Chairman Barney Frank that his department "could support proposals to increase credit union member business lending provided safety and soundness issues are addressed."
Geithner, who was providing details to a proposal outlined by Treasury Department Counselor Gene Sperling at a House Financial Services Committee hearing late last month, said the administration favors an approach that would maintain the current limit of 12.25% of assets for most credit unions but increase the cap for those that meet certain higher standards.
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These higher standards would include credit unions that: have been at 80% or more of its MBL limit for four consecutive quarters, are well-capitalized (above 7%), have at least five years of experience of doing member business lending, have "strong policies and experience" in managing member business loans, and satisfy other standards set by the NCUA.
In its draft language, the administration mandates that the NCUA implement a tiered approval process so that credit unions "gradually increase the amount of member business lending in a manner that is consistent with safe and sound operations." This process would be spelled out in proposed rules that the agency must issue within no more than six months after the bill is passed.
Frank (D-Mass.) said at last month's hearing that later this year his panel would discuss and mark up legislation raising the cap on MBLs, which has been introduced by Rep. Paul Kanjorski (D-Pa.) and has 122 co-sponsors. A similar bill has been introduced by Sen. Mark Udall (D-Colo.) and has 11 co-sponsors. Both the Kanjorski and Udall bills raise the cap to a maximum of 25%.
Lawmakers and lobbyists haven't said what legislation the changes to member business lending would be attached to. Frank's committee recently approved legislation aimed at increasing lending to small businesses that includes creating a fund that community banks can borrow from to make business loans.
CUNA and NAFCU haven't objected to that legislation, but banking lobbyists have been extremely vocal in opposing raising the cap on member business lending.
NAFCU Executive Vice President Dan Berger said the opposition of the banks will make it a challenge to pass the legislation because lawmakers don't like to have to choose between credit unions and banks, especially in an election year.
But Berger said the Obama administration's support and the increased backing for raising the cap could make the difference in getting legislation passed.
Last year, small business lending increased at credit unions and fell at community banks, yet banks still do much more business lending than credit unions.
In March, credit unions had $35.6 billion in outstanding small business loans, according to the NCUA. CUNA said 360 of the 2,158 credit unions that offer MBL are likely to, within the next year, reach the 12.25% cap, which Congress mandated in 1998.
The FDIC reported that there are $696 billion in outstanding bank loans of under $1 million each to businesses.
In his letter to Frank, Geithner stressed the importance of working to implement these changes to the Federal Credit Union Act in a way that does not inappropriately cause "more risk to credit union members, the credit union system, the National Credit Union Share Insurance Fund or the financial system as a whole."
In February, NCUA Chairman Debbie Matz promised Geithner in a letter that any additional lending capacity "would not result in unintended safety and soundness concerns."
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