Credit Unions Seek More Loans For Business | Banks: Federal bill is unfair
Several credit unions in Central Massachusetts are close to hitting their allowable lending ceilings, but they’re banking on federal legislation that would raise the limits on how much they can loan to businesses.
Marlborough-based Digital Federal Credit Union and Worcester-based Webster First Federal Credit Union are very close to the cap, according to public data from the National Credit Union Administration, and Millbury Federal Credit Union is getting close to that limit.
Credit unions who are up against the cap, which is set at 12.2 percent of total assets, are forced to share loans with other credit unions or, in some cases, even turn business away. “They don’t want to run into a situation where they have to cut people off,” said Daniel Egan, president of the Massachusetts Credit Union League, which is based in Marlborough.
Michael Lussier, president and CEO of Webster First, said his lending staff must calculate their loans-to-asset ratios every day to make sure they don’t exceed the cap. Webster First has been up against the cap for approximately a year.
“I don’t think it affects our growth, but it affects our yields,” or how much the credit union can earn from loans, Lussier said. “This is a tough environment to make the yields since interest margins are so narrow.”
The Small Business Lending Enhancement Act of 2011 would more than double the federal cap on business lending by credit unions to its members, from 12.2 percent to 27.5 percent of total assets.
The legislation would not affect consumer lending.
Lussier, who chairs the board of directors for the National Association of Federal Credit Unions, testified in June in favor of the bill before the Senate Committee on Banking, Housing and Urban Affairs.
In his testimony, he laid out the argument in favor of the cap increase, that it would create jobs, spur small business growth and help meet demand for business loans. Lussier told senators that credit unions could safely lend more than what the “arbitrary” cap allows and that the nonprofit institutions have good business lending track records, with low rates of bad debt write-offs.
Banks Opposed
Banks are against the legislation. They argue that weak demand for loans, rather than tightening lending standards, has led to declines in credit for small businesses since the recession of 2007 to 2009. They also argue that the bill is unfair because credit unions, as nonprofits, don’t pay federal taxes like banks do. However, credit unions point out that a certain class of banks also doesn’t pay federal taxes, and that the tax break for those banks amounts to more than it does for the entire credit union industry.
Massachusetts banks have noted credit unions’ increasing market share in the business lending segment. Compared to Massachusetts community banks (which have no more than $10 billion in assets), credit unions in the Bay State have increased their market share from 3.5 percent to 10.4 percent over the past decade, according to the Massachusetts Bankers Association.
“In our view, you really have a piece of legislation that’s going to benefit a very small group of predominantly large credit unions,” said Jon Skarin, director of legislative and regulatory policy for the bankers association. “These are very aggressive, high-growth credit unions that are really looking to do things outside of what their charter is designed for.”
Skarin said some credit unions are acting more like banks and should be taxed by the federal government.
Tim Garner, DCU’s senior vice president of marketing and strategic planning, disagrees. “We’re trying to serve our members,” he said.
DCU has had to watch its cap closely for the past year-and-a-half. The credit union’s $428.6-million business lending portfolio, the largest among credit unions in the state, accounts for 11.2 percent of its assets.
Garner said demand for loans has dampened in the past few years, but he insisted there are still businesses who are being shut out of the credit market and who might find help at a credit union.
“I think when the economy went south, a lot of lenders kind of backed out of the market and stopped making loans,” he said. “Small businesses were increasingly turning to us for help.”
But there’s not much DCU can do when it’s so close to the cap, Garner added, though he noted the cap is a moving target: If DCU grows its assets, its loan cap increases.
“Businesses are asking for our help, and we really want to,” he said.
Skarin, said less than half of one percent of credit unions in the country are up against the cap, and he argued that the legislation would only benefit a few credit unions.
“Sixty or 70 credit unions in Massachusetts do business lending out of over 200 total,” he said. “For the vast majority of those, they’re not even close to the current cap.”
One credit union that has a ways to go before it hits the cap is GFA Federal Credit Union in Gardner. Tina Sbrega, president and CEO of GFA, said she favors the legislation despite the fact that GFA’s lending to business members amounts to only 4.6 percent of its total assets.
“For us, it’s not currently an issue but certainly we would expect it to be in the future,” Sbrega said. “We’re not looking to become commercial banks. We’re looking to serve the small business market as a niche opportunity for us.”
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