Credit unions aren't qualified or positioned to make many of the commercial loans now permitted following NCUA's sweeping changes to its business-lending regulations, banks are saying.
The new rules would let the more than 6,000 federal credit unions make unsecured business loans, raise the loan-to-value limit on loans for trucks, tractors, and other business vehicles from 80% to 100%, and permit CUSOs to originate business loans.
Moreover, shares of loans purchased from service organizations or other credit unions would not count against a congressionally mandated cap limiting the dollar amount of a credit union's business loans to 12.25% of its assets.
Bankers, already outraged by the field-of-membership revisions that were approved at the same time, are promising to flood NCUA with letters protesting the business-lending proposal. In short, the banking industry claims that the latest proposal would give credit unions far more authority to make business loans than was ever intended by Congress. Banks and credit unions are always at odds, but this year is shaping up to be the most contentious since 1998, when Congress passed the Credit Union Membership Access Act.
Bankers are still steaming over the Small Business Administration's decision in February to allow credit unions into its flagship loan program. Keith Leggett, an economist with the American Bankers Association, said that what the credit union body is proposing would violate the 1998 law. Congress imposed the 12.25% cap on business lending as the price the industry should pay in exchange for its exemption from the federal income tax.
"It's using regulatory fiat to over-turn what Congress put in place just five years ago," Leggett said.
Albert C. Kelly Jr., the president and chief executive officer of the $495-million SpiritBank in Tulsa, Okla., said that most credit unions have no business making commercial loans because they have no commercial-lending expertise. He also pointed out that when thrifts began making business loans in the late 1980s and early 1990s, many ended up failing. "You can't get into this kind of lending, and you can't expand the way they're expanding, without seeing your asset quality suffer," Kelly said.
NCUA Board Member Deborah Matz dismissed those concerns. Matz, whose request for a review of the business-lending rules led to the changes the regulator is considering, said banks and credit unions do not even serve the same markets. "Member business lending is not about loans for golf courses or high-rise office buildings," she said. "Credit union commercial lending is for members who want, for example, to start a home-cleaning business or buy a dump truck or open an ethnic market. Those are the loans banks won't make, not because they're too risky, but because they're too small." NAFCU President Fred Becker agreed. He said that since banks are not serving small, start-up businesses and entrepreneurs, they should step aside and let credit unions do it. "They need to recognize what's good for the country as a whole," he said.
NCUA 'Running Wild'
Credit union advocates note that business lending by credit unions barely shows up on the financial industry's radar screen, making up just 2% of the industry's $343 billion loan portfolio at the end of 2002.
One former member of the NCUA board said the ceiling on credit unions' business lending is bad public policy. "Anytime you choke off a means of funding for business, you're making a mistake," said Geoff Bacino, now a consultant in Alexandria, Va. "The cap isn't right. Financial institutions are in the business of making loans."
Daniel J. Devine, the president and chief executive of the $170-million Rondout Savings Bank in Kingston, N.Y., said NCUA was not fulfilling its regulatory responsibility.
"I'm concerned that the NCUA is running wild and giving credit unions permission to do things that they don't have the authority to do," Devine said.