Banks, Credit Unions Compete

Tighter lending restrictions and old legislation preventing credit unions from lending out more than 12.5% of their asset worth are making it hard for them to compete with …

Tighter lending restrictions and old legislation preventing credit unions from lending out more than 12.5% of their asset worth are making it hard for them to compete with large banks for lending customers. Some experts argue that increasing the lending cap for credit unions will put more people to work and help further stimulate the housing market, but the banking industry has lobbied hard to avoid the scenario because they’re worried credit unions will poach business from them, particularly in the arena of small business. For more on this continue reading the following article from TheStreet.

Getting a small business loan at a credit union could become easier if legislation that lowers lending caps on the industry finally passes, maybe even this year.

The credit union industry is looking to reform the Credit Union Membership Access Act, a 15-year-old change to the Federal Credit Union Act that restricted total loans from rising above 12.25% of the institutions total assets. Multiple bills in Washington have proposed raising the cap to 27.5% — but to no avail. The House has already introduced legislation this year to renew the bill’s efforts; the Senate also plans to reintroduce a bill in the coming months, sources say.

"Here in New York State, if we have [the] member business lending cap increased, we know we could put over 10,800 New Yorkers back to work and over $1 billion lending opportunities to small businesses throughout New York State," Credit Union Association of New York president and CEO Bill Mellin said in a phone interview. "It doesn’t cost the taxpayer a dime to do this, it just requires a fix on a law that’s really outdated and shouldn’t be there."

The credit union industry has been fighting this fight – primarily against the banking industry, as opposed to policymakers – for many years. But the industry is pushing hard this year to get their agenda passed, particularly since capital markets remained largely closed for small businesses eager to get a loan. The lack of credit union options has forced some small businesses with to seek alternative lenders for funding.

In testimony on Capitol Hill on Wednesday, Pamela Stephens, CEO of Security One Federal Credit Union, urged Congress to raise the cap that limits the amount of small-business loans total loans that credit unions are permitted to make.

"The current cap on business lending essentially prohibits a credit union like mine from entering the market," Stephens said as she testified before the House subcommittee on financial institutions and consumer credit to discuss regulatory burdens faced by credit unions.

The hearing was the second in a series the committee is holding to focus on the Dodd-Frank Act’s regulatory burden and the resulting economic consequences.

"If my credit union engaged in business lending, my cap would be about $6.5 million; the cost of hiring an experienced business lending staff does not make sense for me when that operation would have to shut down soon after it became successful," according to Stephens’ written testimony. "That is just what the business lending cap does – it discourages credit unions from successfully serving their members."

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Small-business lending is a hot-button issue given recent data showing that banks in the fourth quarter improved their rate of approval for loans under $1 million for the first time in 10 quarters by 0.4% to $586 billion, according to Call Report data by the Federal Deposit Insurance Corp.

That includes increases by all loan size categories, including loans under $1 million, loans between $100,000 and $1 million and those under $100,000, boosted by lending from banks with at least $1 billion in assets, according to a report issued by the Small Business Administration’s Office of Advocacy.

Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM) and other large-banking titans have been promoting their commitments to small-business lending.

And small banks are aggressively increasing their SBA lending, says Biz2Credit CEO Rohit Arora. Small-business loan approval rates by banks with less than $10 billion in assets reached a record high of 50.8% last month, according to Biz2Credit’s monthly lending index.

Small banks and credit unions typically compete for the same small business borrowers.

On the other hand, March small-business loan approvals at credit unions are at a 10-month low. Loan approvals have fallen by one-fifth from a year earlier, Biz2Credit says.

"As banks have returned to the small-business credit market, the better qualified loan seekers are applying to banks for funding, thereby leaving credit unions with riskier candidates," Arora said in a release on Wednesday. "For the credit unions to bounce back in small business lending, they must improve their technology and expedite the loan process."

The biggest obstacle to getting Washington approval to raise the cap may come from the banking industry, specifically community banks which are worried about credit unions encroaching on their small-business turf.

Not only are community banks concerned about market share, but they also argue that credit unions should play on the level field as they do, specifically referring to the entities’ non-profit statuses, meaning they are exempt from federal income taxes, as well as exemption from certain financial regulation, such as the Community Reinvestment Act.

The credit union industry — 7,000 state and federally-chartered U.S. institutions — counters that there isn’t much overlap, i.e., reasons to be worried about market share.

"Obviously, the loans we’re making are considerably smaller," Mellin says. "A lot of the loans we’re making, frankly bankers aren’t interested. Our average is $250,000."

In fact, the average size of credit union loans at year-end 2012 was $217,000, according to the Credit Union National Association, the industry’s trade association. Credit union member-business loans represented just 1.5% in market share of total credit union/bank business related loans, CUNA says.

So essentially doubling the lending caps for credit unions wouldn’t move the needle drastically in the small business loan market, argues John Magill, CUNA’s executive vice president of government affairs.

"We’ve been working on this for several years,’" Magill says. "We got really close … particularly in the last Congress, but still the legislation wasn’t able to get up to a vote in the Senate. I get the sense on the Hill the masses are getting angry with a do-nothing Congress and they want to show some movement."

Several Congressional members of the House and Senate continue to pledge support for legislation. On the Senate side, longtime proponent, Sen. Mark Udall (D., Colo.) plans to reintroduce a proposal seeking to relax the member business lending caps.

"There’s great support for it," says Alex McCarthy, press secretary for Senator Udall. McCarthy couldn’t give an exact date on when the senator plans to introduce the bill.

In February, Rep. Edward Royce (R., Calif.) and Carolyn McCarthy (D., N.Y.) re-introduced the idea under H.R. 688, The Credit Union Small Business Jobs Creation Act. Reps. Royce and McCarthy were joined by 34 additional co-sponsors on the legislation.

This article was republished with permission from TheStreet.


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