A bill making its way through the U.S. Senate is expected to boost the ability of credit unions to offer business loans.
In December, New York Democrats Charles Schumer and Kirsten Gillibrand joined a bipartisan group of colleagues to introduce the Small Business Lending Enhancement Act of 2009. The legislation would more than double the limits on credit union business lending. Proponents say it would give small businesses access to billions of dollars in additional credit and create thousands of new jobs.
"This bill is going to make a lot more credit available through credit unions to help small-business owners," says Christine Peters, president and CEO of Family First of New York Federal Credit Union, one of a relatively small number of credit unions in the U.S. that make commercial loans.
The Credit Union National Association, which represents roughly 90 percent of the nation’s 8,000 credit unions, supports the bill.
"It means for credit unions that they have another opportunity to make loans," says Patrick Keefe, a CUNA spokesman in Washington, D.C. "It gives them another line of business."
Under current law, credit unions can devote no more than 12.25 percent of their assets to business loans, excluding loans of less than $50,000, Schumer’s office says. The Senate bill would boost that to 25 percent of assets, and loans of less than $250,000 would not count against the cap.
CUNA says those changes could allow an additional $10 billion in credit to go to small businesses in the first year after the bill passes and would help to create as many as 108,000 jobs. Peters says Family First’s cap on business loans would rise from nearly $13.5 million to just over $27.5 million.
The banking industry, however, opposes Schumer’s proposal. Michael Smith, president of the New York Bankers Association, says tax laws already give credit unions an unfair advantage over banks. Banks will fight measures like the proposed Small Business Lending Enhancement Act until that imbalance is eliminated, he says.
Credit unions are financial cooperatives that provide some of the same services as banks but differ from them in several ways. To begin with, they do not have stockholders.
"The bank’s responsibility is to their stockholders," says Michael Vadala, president of the Summit Federal Credit Union, which does not make business loans. "The members own the credit union."
Traditionally, most credit union members have joined through their employers. Their savings are referred to as shares and earn dividends instead of interest. As financial cooperatives, credit unions are exempt from federal income tax, though members are taxed on their dividends. That has drawn heavy fire from the banking industry.
"The bulk of our banking membership-probably 120 to 130 members of ours-day in, day out are competing in the community for business," Smith says, referring to New York’s banks. "This tax advantage, which credit unions have because they do not pay income taxes, is a significant pricing advantage."
Until that is eliminated, the industry will take "a very consistent and firm stand against the expansion of credit union authority," he says. "If that were dealt with, then, quite frankly, we would not have an objection to what the senator has proposed."
By law, credit unions can lend only to members, other credit unions and other credit union organizations. Until the late 1990s, they could determine how much of their assets they devoted to business loans.
"There were no restrictions on credit union business lending," Keefe says. "None."
In 1998, Congress passed the Credit Union Membership Access Act, overturning a U.S. Supreme Court decision on membership restrictions for credit unions.
"It allowed us to continue bringing in members from employer groups all across the country," Keefe says.
But it also contained a provision CUNA did not desire-the 12.25 percent cap on total business loans.
"The banking industry was successful in lobbying for a restriction on credit unions’ business lending," Keefe says. "We felt it was more important to get the membership aspect passed and deal with this business lending at another time."
As a result, credit unions, which generally dealt in personal, home equity and other types of consumer loans, became more reluctant to branch out into business lending.
"Business loans tend to be larger loans," Vadala says. "We were always concerned about that cap, because, frankly, that kind of money can get eaten up pretty quickly."
Compounding that problem is the expense and effort required to set up a business loan program.
"There’s a lot involved, because of the regulations surrounding the whole process of business lending," Peters says. "There’s definitely a higher level of expertise required in order to properly underwrite a business loan."
And then, there are risks.
"It doesn’t take too many bad loans to all of a sudden make this thing such that it isn’t profitable," Vadala says.
Keefe says only 6 percent of credit unions make business loans, most of them in the $200,000 to $225,000 range. As of September 2009, the average size of a member business loan in New York was $240,000.
In recent years, member demand for business loans has increased among local credit unions, driven in part by changes in the credit climate.
"The biggest banks are lending to the biggest businesses, and the smallest banks-there’s not enough of them to take care of the demand," Vadala says.
Credit unions have tried to jump into that gap. In New York, credit union business loans rose 23 percent in the year preceding September 2009, Keefe says. Closer to home, Family First’s business loans rose from some $546,000 in 2007 to just over $2.6 million in 2009.
Other credit unions either are considering entering the business lending market or are preparing to do so. Summit’s Jan. 1 merger with the Syracuse Federal Credit Union left it with about $635 million in assets and in a better position to consider starting a business loan program.
Passage of the Senate bill would be an additional incentive to make business loans, Vadala says. "I would say sometime in 2011 there’s a chance we would go into it."
Brian McLaughlin, ESL Federal Credit Union’s vice president and lending center director, says his organization is ahead of the curve. ESL began preparing three years ago to serve members-some of them former Eastman Kodak Co. employees-who have started businesses.
"Our customer base is demanding some capability for us to offer business banking, especially to small businesses," says McLaughlin, who joined ESL less than two years ago and is the driving force behind its business loan program. "We’ve developed a business plan, received approval from our board of directors and are in the process of hiring a director for business banking."
If things go the way credit unions desire in Washington, ESL’s ceiling on total loans could be as much as $720 million when it begins offering business loans sometime this year. McLaughlin says the credit union will build its business loan portfolio slowly, but he points out that business banking will have a special place at ESL’s new downtown headquarters on Chestnut Street.
"We are putting it on the first floor," he says.
Mike Costanza is a Rochester-area freelance writer.
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