Credit Unions Want More Business Loans

With all the ideas for stimulating job creation, and all the economic anxiety surrounding it, the notion of raising the cap on business lending by credit unions has been called a "no-brainer." But is it?

In the intensifying combat between Wisconsin credit unions and their banking counterparts, federal lawmakers have an interesting judgment to make on legislation known as the Small Business Lending Enhancement Act: should they pass legislation that would free up considerable capital for small businesses, but could also impact a credit union's ability to serve people of modest means?

Credit unions here and elsewhere contend they have ample funds and a willingness to lend to stimulate the economy – they estimate $405 million in new credit, enough to create an estimated 4,400 new jobs in Wisconsin in the first year after passage of the act – but they claim their hands are tied by a federal cap on business lending. The legislation would raise the cap from the current 12.25% to 27.5% of total assets, but thus far Congress has not acted on the bill. Credit union interests blame
political influence of the banking industry, but bankers have some ammunition related to the tax-exempt status of credit unions.


State of the unions

Considering the state of the economy, credit union executives are pleased with the health of an industry with 2.2 million members statewide. One reason it has weathered the recession is that credit unions have taken some market share from banks, which were at the epicenter of the global financial crisis.

Kim Sponem, president and CEO of Summit Credit Union in Madison, said Summit has gained 36,000 new members since January of 2009, bringing its total membership to 121,000. In addition, it has gained tremendous market share in terms of mortgage lending volume, originating $550 million in mortgage loans last year, and is on pace to exceed that in 2011. Summit also has experienced a surge in auto loan originations, which were 50% higher in August 2011 compared to August 2010 ($60.4 million vs. $90.8 million this year). Also, auto loan volume year-to-date already is slightly ahead the full-year total for 2010.

On taking market share from banks during the recession, Sponem said, "I think it has picked up a lot during the recession and post-recession. Credit Unions have been growing overall for several years, but the rate of growth from a market share perspective has been even greater."

UW Credit Union does not make business loans, but it also has fared well during the recession in terms of membership and consumer loans, according to Paul Kundert, president/CEO. Membership grew by 40,143 members in the three years ending June 30, 2011, compared to 17,545 in the three years prior to that.

In the past 36 months, UW Credit Union saw a 39% increase in checking accounts served, compared to 18% in the three years prior to that. In the four years ending in 2010, it experienced a 275% increase in market share for home purchase financing in Madison.

Kundert said that during the height of the recession, Wisconsin credit unions continued to offer consumer credit on the same terms, which he described as a counter-cyclical practice in light of what was happening with the availability of credit.

"We did not curtail or cut credit card limits to consumers during that crisis," Kundert noted. "A lot of consumers found their credit card limits arbitrarily cut by major companies, but credit unions generated considerable goodwill by continuing to make credit available when others were reluctant to do so."

Brett Thompson, president and CEO of the Wisconsin Credit Union League, cited a strong net-worth ratio – the return shareholders would receive if all profits were passed directly to them – of 10% (7% is considered well capitalized), and a loan-to-savings ratio of more than 85%. The latter metric means that credit unions are lending out nearly 86 cents on every dollar of deposits they bring in. "In an environment in which people are looking not as much to borrow but to save, that's a strong statement of credit unions' commitment to extending loans to our members," he said.

Thompson expects year-end numbers to show that credit unions gained more ground on banks, in part because of the downturn in the economy and merger and acquisition activity in the banking industry. "I think you see movement to credit unions whenever you have significant merger activity in the banking industry," Thompson said, "so because of some of the changes going on in some of the largest banks in this state, I would expect to see more folks becoming members and doing business with credit unions that are locally owned and locally controlled."

In addition to the Small Business Lending Enhancement Act, credit unions were pre-occupied with controversial language placed in the state budget that would make it easier to convert from a credit union to a bank. While the Wisconsin Credit Union League opposed the change, in large measure because there was no opportunity for public input, Thompson said the league is not aware of any credit unions lining up to become banks. More significant is legislation to raise the business lending cap, which Thompson said would serve a small business niche that banks largely ignore.

Prior to 1998, there was no limit on credit union loans to small businesses, and credit unions claim that lifting it to 27.5% of assets would extend $13 billion in new credit and create 140,000 new jobs nationally. "That's significant, and it could be done at absolutely no cost to taxpayers, no expansion of government," Thompson said. "This is something that we believe should be done as a 'no-brainer' solution to some of the issues our economy faces at this point."

Thompson says that credit unions have historically had one-tenth the amount of loans charged off in the business-lending arena that banks have had, and that the average business loan by credit unions is about $180,000. "It's done safely, it's done soundly, and it's still a very small percentage of the overall business lending market," he stated. "It is clear, unlike what is often done by many banks, that credit unions are serving a niche, and it's a small-business niche."

Citing the fairness of a level playing field, Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association, said bankers would be more agreeable to lifting the lending cap if the state and federal governments eliminated their respective income tax exemptions for credit unions. "We have opposed raising the cap, and that's driven by the tax exemptions for credit unions at the state and federal levels, which are in place to make sure they serve people of low and modest means," she said.

"They were not given a tax exemption to be the same as a commercial bank, which are in business primarily to make business loans. The two issues really do go hand-in-hand."

Oswald Poels said the state office of credit unions can waive the 12.25% cap under certain conditions, including a history of business lending. "We find curious the arguments they typically make that they would like to be in a position to do a lot more lending than they do today," she stated. "There are nine Wisconsin credit unions that are exempt from that 12.25% ceiling that have demonstrated a history of making business loans. Royal Credit Union (Eau Claire) is at the top with business loans of up to 35.65% of its assets (June 2011)."

Other credit unions, she added, are nowhere near the 12.25% cap, "so they could make many more business loans today without going over the ceiling."

Sponem admitted Summit Credit Union is under the cap, but is always mindful of it. Summit's average business loan size is about $200,000, but that is skewed upward by several large loans. "If that cap does not get raised, we are going to have to limit our business lending," she said. "We don't want to get to that point."

Sympatico with banks?

One area where there is solidarity between banks and credit unions is their distaste for a regulatory climate being shaped by legislation such as Dodd-Frank, federal truth in lending, and regulation of mortgage originators. Banks hate them because they increase the cost of doing business, and credit unions wonder what they ever did to deserve them, especially with compliance occupying time better spent tending to their members. "What we see happening is more and more regulation of entities that are really tied to the wrongdoers," Thompson said, "but credit unions are caught up in the cross hairs because many of these regulations apply to the $15 million credit unions as much as they apply to the $15 billion bank, and that has a terribly chilling impact on credit unions' ability to compete."

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