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More Credit Union Business Lending Would Boost Economy

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It's time for our nation's leaders to get serious about job creation. Our economy is beginning to inch its way forward toward recovery, but the only way forward to real prosperity for all is through small businesses.

According to the Census Bureau's Longitudinal Business Database, the smallest of small businesses — firms with fewer than 50 workers and self-employed workers — provide about 30 percent of all private-sector employment. These are the firms critical to future economic growth and new jobs. They are the incubators of new ideas. Imagine if Bill Gates or Steve Jobs were to have tried to start their companies in today's credit environment. Yet, these are the businesses at risk of being left behind because it is more difficult, if not impossible, for them to get credit from a commercial bank or through a government loan.

These smallest of the small are the credit union sweet spot. The big banks don't want to lend to them, and neither do the small banks. Credit unions specialize in smaller loans. They are relationship lenders seeking to serve their members in every possible capacity.  Even though credit unions are the ideal lenders for these businesses, they are limited in the amount of business loans they can extend to their members because of the arbitrary cap.

Sen. Mark Udall's (D-Colo.) proposal would raise the cap allowing credit unions to increase their business lending without costing taxpayers a dime. In the first year alone, the result could be as much as $13 billion in additional lending to help small business owners expand or for an entrepreneur to launch a new start-up company or for a professional to hang out their own shingle.

March 2012 data from a NAFCU study of credit unions showed credit unions are making loans to small businesses, but the current member business lending cap is preventing them from doing more.

The study showed that 10.3 percent of credit union respondents had to turn down small business loans to their members over the last 12 months due to cap restrictions, while 13.8 percent have been forced into a loan participation arrangement to stay under the MBL cap.

Yet, demand for member business loans has been picking up. One-fourth of credit unions in the NAFCU survey have seen an increase in demand for Small Business Administration loans in the past 12 months.

And contrary to what the bankers are saying, these are small business loans that the banks don't want. The credit unions said that 44 percent of their portfolio was made up of loans of less than $100,000 compared with banks that only have eight percent of their lending in this size category. In addition, credit unions' said their lending for loans between $100,000 to $250,000 were 20 percent of their portfolio, compared with six percent for banks. Alternatively, business loans over $1 million make up 68 percent of the banks portfolios, but only 16 percent for credit unions.

Smaller businesses need more options for getting credit. As Brian Martin of the Progressive Policy Institute noted in a recent policy brief, "credit unions, which already help many small borrowers finance their self-employment and small business ventures with personal loans, lines of credit and limited business loans, could be an ideal source of credit for these underserved entrepreneurs."

The paper notes, among other things, that between 500,000 to 600,000 new smaller businesses come into being and create between 2.5 million and 3.5 million new jobs each year, and they account for 40-50 percent of the jobs created by new businesses annually.

It's time for bankers to put aside their petty concerns about competition and do what's right for our country's future. Let the marketplace work. Our country needs jobs. And as far as I can see, the only way to put more of our unemployed back to work and to provide jobs for those just entering the workforce is by letting credit unions provide more credit. In the end, everyone wins.

Fred R. Becker is the president and chief executive officer of the National Association of Federal Credit Unions.

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Comments (1)
The article sounds good, but a few more facts would help the discussion. If the fundamentals of the business loan are sound, most (I dare say all) healthy banks will bend over backwards to book an asset earning 4% or more vs. keeping funds at the Federal Reserve earning 0.25%. According to data from the National Credit Union Administration, of the nearly 7,200 credit unions, only about 30 are at or near the current mandated lending cap. When it comes to the cap calculation, small business loans under $50,000, or those backed by a government guarantee (such as SBA loans), don't count towards the cap at all. As of June 2011, only about 1,800 credit unions chose to offer small business loan products (down from about 1,900 in 2008), choosing instead to focus on their original government mandate to meet the credit and savings needs of consumers, especially persons of modest means. Since business loans constitute only a small percentage of credit union lending, there is a possible concern that credit union lenders and even NCUA examiners would lack sufficient expertise in the area. As experienced lenders know (and as the country has learned through the mortgage crisis), a loan improperly granted and/or structured can do a weak borrower more harm than a loan not granted. Bankers understand that the wellbeing of their bank is directly tied to the wellbeing of their community (and vice versa), so prudent lending to boost economic growth is a strategic imperative. And, by the way, bankers are not afraid of competition ... when the playing field is level. If a bank charges a taxable 6% for a loan, and the credit union--because of its income tax exemption--need only charge 4% to end up in the same place, one can argue that the credit union does not need any further advantages. There are plenty of consumers (of modest means) in this country that could benefit from the 4% money without needing to divert that money towards large businesses or commercial real estate developers. In the case of those few large credit unions that want in most respects to do most anything banks can do, they can convert their charters to mutual savings banks and then join the fray as an equal competitor on a level playing field.
Posted by CJBBJC | Monday, April 02 2012 at 4:08PM ET
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