By Cheryl D. Cook, Attorney
If capital is the fuel that drives business development, then it should stand to reason that the more business lenders in the market, the better. According to the United States Small Business Administration, small businesses accounted for 65% (or 9.8 million) of the new jobs created between 1993 and 2009.
However, because credit unions are limited in their ability to extend business loans to a relatively small percentage of their total assets, credit unions occupy a smaller share of the business lending market. Absent an exception from the National Credit Union Administration (NCUA), credit unions are not permitted by law to have outstanding member business loans exceed 12.25% of their assets.
The Small Business Lending Enhancement Act (S. 2231) seeks to increase this limit to 27.5% of assets.[1] The bill includes controls, such as a requirement that, to exceed the 12.25% limit, credit unions would need to be well-capitalized and demonstrate five years of sound underwriting and servicing of business loans. In addition, the bill would maintain close NCUA control to monitor expansion of the member’s business lending portfolio to the 27.5% proposed in the legislation.
Banks, in general, have opposed increasing credit union business loans at higher percentages of their asset base, claiming that because credit unions enjoy nonprofit status that shields them from state and federal taxes, they would have an unfair business advantage.
In addition, there have been reports that smaller credit unions also oppose the proposed legislation because they believe that passage would expose them to increased liability if they have to share responsibility for failure of business loans made by larger credit unions chasing higher revenues at the expense of sound underwriting and risk management practices.
In April 2012, Dennis Moriarity, the treasurer-manager of Unity Credit Union, a local Michigan credit union, wrote a letter to the United States Senate and the Banking, Housing and Urban Affairs committee, which has now become public record, expressing his concern about the potential risk to credit unions that do not participate in business lending.
“Our concerns lie with the exposure that this enhanced authority would present to the thousands of credit unions that currently do not participate in business lending or are at ease operating within the current limits of the law,” Moriarity said. “The exposure is to our reserves and retained earnings which could eventually be confiscated to pay for the mistakes of lenders who are unfamiliar with the complexity of business lending or who might ignore risks in pursuit of revenues.”
However, those supporting the legislation have suggested that credit unions’ ability to offer these loan products to their members would provide growth opportunities, and that the banks’ claim of unfair tax advantages is just sour grapes.
According to Bill Cheney, President and CEO of Credit Union National Association (CUNA), in a published statement, “…raising the 12.25% cap to 27.5% would produce a conservatively-estimated first-year increase of $14 billion in loans and 157,000 jobs nationally.” Cheney further noted, “S. 2231 is about giving the credit unions with the most business lending experience the opportunity to continue to lend to their members, and continue to help in the economic recovery.”
Credit unions interested in increasing their volume of business loans should focus on their evaluation of business customers before making loans. Proper investigation and underwriting on the front end can save a great deal of aggravation on the back end in any loan transaction, and a track record of well-performing business loans may go a long way to support the increase on business lending limits should the legislature move forward on this law during the next year.
In any event, it does not appear that the issue will be resolved soon. While greater availability of capital would encourage business growth, the events of the last several years mean that any proposal to increase lenders’ risk will undergo strict scrutiny in an attempt to head off further bail-outs or other disasters. Input from credit unions on both sides of the debate will be necessary to provide legislators with the information they need to make further decisions on this topic.
[1] As of Monday, November 26, 2012, the legislation was discussed as a bill for the Senate floor that week, but remains in committee. It is unlikely to move further until 2013.
Cheryl Cook is an attorney in the Bankruptcy unit located in the Detroit office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 248.989.3089 and chcook@weltman.com.
That Credit Union Blog 
“If capital is the fuel that drives business development, then it should stand to reason that the more business lenders in the market, the better.”
Not sure I agree with this. In the middle of the first decade of the new century, there were plenty of mortgage lenders in the market, making loans to people who were ill-prepared to pay for those loans.
What’s needed is smart lending, not more lending.
And while I’m not against raising the lending cap, let’s be honest about why CUs are REALLY advocating for the increase:1) Because they’re flush with deposits that they need to do something with (because consumer lending is still depressed), and 2) Because they need new sources of revenue as they cling to free checking in a world where everyone else has abandoned it.
You are absolutely correct that “credit unions interested in increasing their volume of business loans should focus on their evaluation of business customers before making loans.” I do wonder, however, how many CUs are really good at doing that.