Small Business Owners Hike the Hill

Business leaders join forces with CUs to raise the member business loan cap.

July 09, 2012
KEYWORDS banks , jobs , legislators , lending
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Why should CUs care?

Although credit unions offering MBLs are in the minority (31%), raising the cap is an issue all credit unions should care about, Green says. For one, more credit unions would offer business services if the cap increased.

“At the current cap, it’s difficult to fund comprehensive business services from that small of a loan portfolio—the necessary infrastructure and expertise are too expensive,” Green explains. “There are credit unions close to us that won’t even do business loans because the cap doesn’t allow enough volume to support the infrastructure.”

Business lending’s prohibitive start-up costs and stringent requirements, including the need to hire and retain staff with business lending experience, make it difficult for financial institutions with less than $45 million in assets—two-thirds of all credit unions—to enter this arena.

A $45 million asset credit union would be limited to $5.6 million in MBLs, CUNA reports. That’s roughly 25 loans, using industry averages. A portfolio of this size would generate roughly $170,000 in income—but $180,000 in expenses (this includes $88,000 for the salary and benefits of an experienced lender, $56,000 in other operating expenses, and $28,000 in loan losses).

Raising the cap to 27.5% of assets would allow credit unions as small as $20 million in assets to participate in business lending, giving the market access to more than 700 additional credit union lenders, CUNA estimates.

Plus, “history reminds us it’s wise” not to restrict credit unions’ powers, says John Radebaugh, president/CEO of the North Carolina Credit Union League, citing two ground-breaking initiatives, “save our share drafts” and the passage of H.R. 1151. In both cases, some credit unions had no plans to offer share drafts or to move beyond a single-sponsor charter.

“Some of these credit unions not only did not engage on these issues, a few actively opposed the credit union grassroots response,” he says. “How do those decisions look in retrospect? And perhaps more to the point, how many credit unions today are single-sponsor and don’t offer share drafts?”

But beyond the need for loans or expanded authority, the credit union movement must be able to maintain the political clout to define and defend itself, Green adds.

“The banking industry wants to define who we are and what we can and can’t do,” he says. “Whether credit unions participate in business lending or don’t, we should always be able to control our own destiny and not be at the mercy of someone else’s opinions or influence. We need to protect our ability to legislate an expansion of power when we need to. It’s time to unite around this common cause and be heard in D.C.”

Banks muddy the waters

The banking trade groups aren’t making this easy. They’re spreading so much disinformation that during visits with legislators “you spend half your time dispelling false statements the bankers make about credit union business lending,” says Patrick La Pine, president/CEO of the League of Southeastern Credit Unions.

He says banks have taken a page out of the credit union playbook by upping their grassroots efforts. “Before H.R. 1151, most bankers just wrote a check and didn’t do grassroots advocacy. They’re still writing checks but now they’re much more actively engaged with legislators.”

La Pine cites two other sticking points:

1. Politics often trumps policy. He says S.2231 is good public policy and a solid piece of legislation backed by stringent regulatory safeguards and credit unions’ history of making business loans since the early 1900s. But banks are “muddying the water” and trying to change the conversation with legislators.

La Pine believes this tactic is part of a larger, coordinated, anti-credit union strategy.

“We’ve seen this approach even on the state level with public deposits. They’re saying credit unions have an unfair advantage, and that if we want to go outside our little box we’ll have to be prepared to give up our tax exemption. Of course, they don’t talk about Subchapter S,” which exempts nearly one-third of all banks from paying taxes.

The bankers’ approach can be appealing to some legislators during times of high budget deficits and fiscal constraints, La Pine says. “We have to re-educate our state and federal legislators—and their staffs—that our tax status has no bearing on the products and services we offer.”

2. Some legislators believe they have to choose between credit unions and community banks.

“They’re sitting on the fence—and they’ll ride it as long as they can. They all hate the big banks, but they love credit unions and community banks, and they don’t want to choose between the two.”

That’s why it’s important to tell legislators that credit unions’ business loan market share is only 5.7%, CUNA reports. If credit unions doubled their market share in the future, banks would still own 88% of the market.

“I’d like to see an up/down vote so we know where our legislators stand,” La Pine says. “If they vote against us on member business loans, they could vote against us on our tax exemption. We need to know who are friends are—and who’s there just when it’s convenient for them. We should hold those people accountable at election time.”

Ironically, 60% of bankers responding to an American Banker poll said credit unions should be permitted to expand small-business lending. Another 10% agreed as long as those credit unions had sufficient capital.

NEXT: Keep up the fight

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