Raise credit union member business lending cap
Small businesses are the backbone of the commonwealth's economy. When small-business owners need loans and business services, they are increasingly turning to their local credit union.
At year-end 2012, 56 of 504 credit unions in Pennsylvania were actively offering member business loans and/or services. This represents an increase of 12 percent in the number of credit unions with business loans on their balance sheet. Those offering business services are experiencing double-digit loan growth; so it is very evident that small-business owners in Pennsylvania are seeking credit union business services.
Despite the increase in the number of credit unions offering business loans and portfolio growth, credit unions are still overwhelmingly consumer loan providers; member business loans comprise only 4.2 percent of their total outstanding loan portfolio. Conversely, Pennsylvania's banks hold more than $19 billion in outstanding commercial loans, while the credit union balance stands at $882 million.
Pennsylvania credit union business lending remains conservative. Credit unions are not typically providing multimillion dollar commercial real estate deals or loans to fund hotels, new commercial office buildings and/or strip malls, but loans to the true main street small-business owners.
In fact, the average credit union member's business loan in Pennsylvania is around only $170,000 and is typically secured by real estate, business vehicles and/or equipment, according to data compiled from credit unions' federal regulator National Credit Union Administration.
Pennsylvania credit unions know their members and apply safe and sound business-lending practices to each request, as required by NCUA. To date, there has never been a credit union failure in Pennsylvania due to business loan losses or poor business-lending practices.
Today, credit unions stand at a crossroads with their ability to continue to serve small-business owners. The Credit Union Membership Access Act of 1998 imposed an arbitrary business lending cap on credit unions at 12.25 percent of assets to appease bank pressure. Prior to this act, there had been no limits, as credit unions have been lending to small business, safely and soundly, since their inception in the 1930s.
Recently, U.S. Rep. Ed Royce, on behalf of credit unions, introduced H.R. 688, the Credit Union Small Business Job Creation Act, to raise the current member business (commercial) lending cap to allow well-capitalized credit unions to increase their business loan offerings from 12.25 percent to 27.5 percent of total assets.
Banks are actively advocating against the rise in this lending cap for credit unions. Credit unions are fighting back, saying that the 12.25 percent cap is arbitrary and limits their ability to meet those small businesses in need of credit and business-lending services.
Credit unions that offer small-business loans must often sell off loans (loan participations) to other credit unions to keep their balances below the statutory cap and meet member loan demand. In addition, many small to medium-size credit unions, those under $100 million in assets, cite the 12.25 percent lending cap as a barrier to entering the business services market.
Startup costs and regulatory requirements often exceed a credit union's ability to cover expenses, because of the limit in loan dollars a single credit union can hold on its balance sheet. For the majority of Pennsylvania's credit unions, 60 percent of which are under $20 million in assets, making just a few loans will quickly reach the cap limit.
These are all unnecessary deterrents for credit unions to offer any member business services and support small-business growth in communities across the commonwealth.
It's also important to note that member business services are not in every credit union's business plan. The NCUA has stringent requirements for credit unions seeking to offer member business services. Underwriting requirements are different for business loans versus consumer loans, and credit unions must have experienced staff or contract with a third party to meet the requirements.
However, for credit unions that have made the commitment and have member business services demands, they should not be impeded by outdated and arbitrary cap limitations.
Providing funds and services to small businesses is good for credit unions and good for Pennsylvania's economy. The profits small businesses generate from loans provided by Pennsylvania credit unions would be taxed the same as profits from loans generated by banks. In fact, because credit unions typically charge lower loan rates than banks, businesses that borrow from credit unions are likely to have higher taxable income than those borrowing from banks. Communities also recognize a direct benefit from the job creation, job retention and local investment that small businesses provide.
Raising the credit union member business lending cap to 27.5 percent is good public policy which helps support the survival and growth of small businesses throughout the commonwealth. Business owners should be afforded the ability to choose from a variety of financial institutions that meet their business needs. As our economy continues to recover, placing limitations and barriers to small businesses is not advantageous for Pennsylvania.
Jim McCormack, CAE, is president and CEO of the Pennsylvania Credit Union Association, a Susquehanna Township-based trade association that provides legislative, promotional, educational and operational support for credit unions in Pennsylvania. For more information, visit www.ibelong.org.