Local Credit Unions Backing Legislative Efforts to Increase Lending Cap
The small business sector typically acknowledged as vital to the country’s economic lifeblood is hoping for a touted financial shot in the arm if efforts to free up more borrowing capacity from credit unions win national approval.
Currently, credit unions are limited by regulations dictating that they can lend no more than 12.25 percent of their total assets in the form of business loans, dating back to concessions made to the banking lobby when credit union membership access was consolidated in 1998.
But a grassroots movement to increase the credit union lending cap in relation to small business to 27.5 percent of total asset value – which proponents estimate could provide an additional $13 billion in capital and help create 140,000 new jobs nationally in the first year of operation – gained traction in the wake of the economic carnage of the post-2007 “Great Recession”.
The push to offer more help to Main Street eventually led to the sponsoring and tabling of legislation now making its way through Congress in the shape of the proposed Small Business Lending Enhancement Act, which is on the brink of a final floor vote.
Representatives of local credit unions have been among the movement’s vocal supporters, including advocacy by Mid Oregon Federal Credit Union President/CEO Bill Anderson, who also chairs the North West Credit Union Association
Kyle Frick, Mid Oregon FCU VP of marketing and sales, based in Bend, added, “Mid Oregon, for one, is currently bumping up against this lending cap.
“We have $16.8 million in these loans and our current regulatory limit is around $18 million based on our current total asset value.
“We have about $1.5 million rolling off in May and already have interested parties in the pipeline to replace those loans.
“With the increase we are trying to get through Congress, we would have an additional $21 million available to lend.
“My simple math estimates that if we could lend all of that out in the next year, with the average loan being $100k and each loan creating one job, we would be able to increase employment by 210 in the next year in Central Oregon. I think that would have a significant positive impact for us here.
“The bill is on the calendar to go to the Senate floor for a vote and it is a critical time for credit unions to be able to do more to help with recovery of our economy.”
Frick said Credit Unions had been making member-business loans (MBL’s) since their inception in the U.S. in the early 1900’s and in the first 90 years of their existence, there was no MBL cap on credit unions – the current cap being an “arbitrary limit” imposed by Congress in the Credit Union Membership Act of 1998 (CUMAA) following pressure from the banking trade associations.
He added, “The credit union concept actually originated in Europe when people were unable to access capital and decided to pool their resources to loan money out.
“Fast forward to today, and the focus is still on helping economic development grow on a local level. Our group, for example, has more business lending candidates than we can digest now among the close to 22,000 members in our charter area of Deschutes, Crook and Jefferson counties.
“Credit unions are cooperative and collaborative by nature, and a good fit with the local community. A wider example of such a spirit is illustrated by the banding together of credit unions in Central Oregon last year under the banner of ‘Credit Unions Working Together’ to sponsor the Rotary Annual Duck Race which raised $100,000 for charity.
“This bill appears to have a healthy level of bi-partisan support and regionally the support of politicians such as Senator Ron Wyden, who also co-sponsored the bill, and Senator Merkley is much appreciated. The key numbers for Oregon are that some $254 million in additional capital could be opened up in the first year, which could translate into 2700 jobs across the state.
“I am personally cautiously optimistic about the Bill’s passage and hope the overall potential benefit will prove decisive.”
The Wall Street meltdown of fall 2008 and the ensuing credit crisis and recession are generally acknowledged as having hit small businesses harder than medium and large size businesses because they have faced greater challenges in obtaining credit.
Small businesses responded to the recession by laying off more workers than medium and large size businesses, and an often heard clarion call is that boosting the flow of credit now will help the small business sector to lead the recovery of economic growth and employment.
The difference in options regarding business scale is often cited as lying in access to credit – with small businesses more dependent on bank credit than medium and large businesses who regained access to credit through the corporate bond market.
There is considerable evidence suggesting not only that there is unmet demand for small business lending, but also that small businesses that would otherwise be interested in pursuing credit are not doing so because of the perception that credit is difficult to get in this economic environment.
As part of earlier efforts to highlight the plight of the small business credit squeeze back in 2010, the International Franchise Association, whose membership according to its website employs six percent of Americans, offered testimony to the House Small Business Committee, stating, “While we estimate that franchise businesses will be able to access $8.4 billion in lending this year, this analysis also shows that we will face a $2 billion shortfall in available loans.
“This shortfall will result in the loss of nearly 8,000 franchise unit transactions, both new business development and transfers, and a loss of more than 82,000 jobs and $10.7 billion in annual economic output.”
Representatives of the National Association of the Self-Employed added that, “Access to capital also continues to be a large problem for the self-employed and microbusinesses, despite efforts by the federal government to spur lending to small businesses.”
The Pepperdine Capital Markets Project conducts an ongoing, twice-yearly survey of U.S. small businesses (classified as those with less than $5 million in annual revenues) in conjunction with Dunn and Bradstreet. Data collected from a sample of over 5,500 U.S. small business owners in 2011 found that nearly one-quarter of small businesses sought a bank loan in the preceding 12 month period.
Among those that sought bank financing some 57 percent indicated that they were not successful in obtaining financing – a seeming indication that a substantial number of small businesses continue to need more access to capital.
One of the report’s key findings was that business owners were generally enthusiastic about growing, but lacked the financial resources to successfully execute growth strategies. The National Small Business Association’s 2011 Mid-Year Economic Report also found that lack of availablecapital was a concern for 22 percent of those responding to its survey of small business owners.
And according to the National Association of Realtors, 87 percent of realtors said that lack of financing impacted their clients’ decisions in 2011. Nearly 60 percent said that they failed to complete a transaction due to financing and lack of available financing was the most frequent response of realtors when asked what were the major obstacles to commercial real estate activity.
Some 65 percent reported significantly or somewhat significantly tightening of lending conditions; none reported a significant easing of lending conditions. The NAR report further states, “While large corporations do not have difficulties securing capital, small businesses have been struggling to find access to financing.”
According to Gallup, 30 percent of small business owners say it is difficult for them to obtain credit – two to three times more difficult than it was in 2006 and 2007.
The demand for small business loans is palpably present in the market and the data suggest that banks continue to constrict credit availability, often in the light of more stringent regulatory oversight, while credit unions are expanding their business loan portfolios.
Since the estimated beginning of the recession three and a half years ago, data indicates that total bank business loan portfolios have declined by almost 14 percent, while credit union business loan portfolios grew at over 40 percent.
Bill Cheney, president and CEO of the Credit Union National Association (CUNA), added, “The recently strong growth of credit union business lending is slowing as an increasing number of credit unions approach the cap, and the support credit unions have provided to America’s small businesses cannot continue into the future unless Congress raises the credit union business lending cap.
“The bank lobby claims that only a ‘handful’ of credit unions are actually capped, but a total of more than 500 credit unions will be bumping up against the cap in the next three years. Most of these credit unions are already looking for ways to moderate their business loan growth.
“As the economy hopefully recovers over the next few years, the business loan growth of this group of credit unions will disappear without an increase in the cap.
“One of the more perplexing arguments made by the bank lobby is that Congress should not increase the cap because there is no excess demand for small business lending but that raising the cap would harm banks by allowing credit unions to take loans from them.
“But research suggests that additional credit union business lending would not ‘crowd out’ bank business lending. And certainly, with the banks controlling 95 percent of the commercial lending market, even a doubling of credit union market share would not significantly alter their dominance of this market.”
He cited a recently published report for the Small Business Administration, in which Professor James A.Wilcox indicated that while developments that boost small business loans at credit unions tended to reduce business loans at banks, the effect was very small. The evidence suggests that the offset was about $0.20 per dollar of additional small business loans at credit unions.
In other words, a reduction in business loans at banks implies that a $1 increase in the supply of small business loans by credit unions would lead to a net increase in business loans of $0.80. Put simply, on average, 80 percent of the increase in credit union lending is new capital that would otherwise not be available in the marketplace. Thus, the contention is that the vast majority of new credit union lending is not “siphoned” from banks that would otherwise make these loans.
Cheney concluded, “Throughout our history, credit unions have existed to serve the credit needs of their members. From the very first days, this has included the business credit needs of members.
“During the recession, credit unions remained engaged in member service, and increased lending to small businesses when other lenders fled the market. The credit unions that contributed the most to this growth are or soon will be approaching the cap.
“In order for these credit unions to continue to serve their small business owning members, Congress must raise the statutory cap. Representatives Royce (R-CA) and McCarthy (D-NY) have put forward a thoughtful bill to achieve this that includes provisions designed to enhance safety and soundness.
“We strongly urge support for this legislation – which would allow credit unions to lend an additional $13 billion in the first year, helping small businesses create 140,000 new jobs.”
