April 22, 2012

Credit unions seek to raise lending cap

Garth Strand has a dilemma.

Garth Strand has a dilemma.

The president of Hutchinson Credit Union is near the point where his $190 million credit union won’t be able to make more business loans to members.

It’s not because the credit union has reached its legal lending limit.

It’s because Hutchinson Credit Union is close to approaching the limit of how much of its loan portfolio can be for business loans. He and other credit union executives say it is an arbitrary cap placed on their institutions in the 1990s as a compromise to being able to expand who can be a credit union member.

A bill in the U.S. Senate could change that. Senate Bill 2231 would raise the cap from 12.25 percent of a credit union’s total assets to 27.5 percent.

“Our small business members have been hearing the message we may have to say ‘No,’ because this arbitrary cap is upon us,” Strand said. “Short of being out of compliance and being out of regulation, we don’t have any choice but to comply.”

‘A small business issue’

As of Friday, the bill had been passed out of committee and was awaiting a vote of the full Senate.

But raising the cap is not a new issue.

This is at least the sixth time credit unions have sought to raise the lending cap, but a measure has never made it through the House or Senate.

“At this point we’re just waiting to see how it goes,” said Haley DaVee, vice president of governmental and public affairs for the Kansas Credit Union Association.

The reasons why efforts to raise the cap have struggled come down to the perpetual battle between banks and credit unions. The banking industry has powerful lobbying efforts in Congress between the American Bankers Association and the Independent Community Bankers Association.

Banks have long fought against legislative efforts by credit unions to expand their business operations, arguing that credit unions’ status as nonprofits affords them an advantage not available to traditional banks. In fact, credit unions did not have a cap on business lending to members until 1998, when an amendment to the Federal Credit Union Act of 1934 was signed into law that instituted the cap.

Until then, most credit unions were limited on who could become credit union members, but those rules were eased, allowing credit unions to grow membership and assets.

“It’s not like they want to go back to the future,” said Chuck Stones, president of the Kansas Bankers Association, which opposes the bill.

Stones said he thinks in 1998 there were fewer credit unions doing or even interested in business lending. “This is a new focus for some of them.”

According to credit union consulting firm Callahan & Associates, in its most recent report available, credit unions’ business lending steadily increased over five years to represent more than 5 percent of total credit union assets in the first quarter of 2010.

Credit union leaders such as Strand said increased business lending isn’t a “classic banks-versus-credit-unions issue.”

“It’s really a small business issue,” Strand said. “Our economy is struggling, and we need as many jobs as we can get. We should be looking for solutions and not roadblocks.”

The industry said a number of business groups have signed on in support of the bill, including the CCIM Institute, National Association of Homebuilders, National Association of Realtors and National Small Business Association.

Safe and sound?

Not all credit unions are close to reaching the current lending cap.

Bob Corwin, CEO of the state’s largest credit union, Wichita-based Meritrust, said member business loans account for about 5 percent of its $820 million in assets.

“We think, just from the principle of the thing, credit unions should not be restricted in any kind of lending without any real rationale or justification for it.”

Corwin acknowledges that “not all credit unions are into making member business loans.”

And he acknowledges that there is a cost to offering them, if a credit union does business lending the right way.

“It requires that you hire individuals that have experience in commercial lending, and software that’s different from consumer (lending) that you need to undertake,” Corwin said. “The major cost would be the personnel required to do business loans well.”

Doing such loans well means making loans that won’t go bad, because the average business loan will be for an amount far and above the typical consumer loan.

That’s where the banking groups say raising the cap also becomes a safety and soundness issue.

“Blowing open the business lending restrictions Congress put into place will only increase the risk exposure of these credit unions,” said ABA president Frank Keating and ICBA president Camden Fine in a February letter to members of Congress opposing the lifting of the cap.

But DaVee, of the credit union association, pointed out that if the bill were to pass, it doesn’t mean there will be an immediate explosion in business lending by credit unions.

She said the bill would lift the cap only for credit unions that:

•  Have five years of experience making member business loans.
•  Employ loan officers on staff with at least two years of commercial lending experience.
•  Maintain a member business loan portfolio that totals 80 percent of the 12.25 percent cap for at least four quarters preceding the credit union’s request to increase its lending cap.

Hutchinson Credit Union’s Strand hopes the bill passes. He doesn’t want to have to turn away a small business member from getting a loan.

“We are trying to find a solution for them, and we are stuck,” he said.

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