WASHINGTON — John Farmakides, president and CEO of Lafayette Federal Credit Union, testified before a Congressional subcommittee Thursday morning about impediments to credit union business lending.
Farmakides, whose $364 million institution is based in Kensington, Md., testified on behalf of NAFCU in front of the House Small Business Subcommittee on Economic Growth, Tax and Capital Access hearing, "Where Are We Now? Examining the Post-Recession Small Business Lending Environment."
He pointed to the passage of the landmark Credit Union Membership Access Act in 1998 as the beginning of statutory restrictions on the ability of credit unions to offer member business loans.
Besides limiting MBLs to the lesser of either 1.75 times the net worth of a well-capitalized credit union or 12.25% of total assets, CUMAA established, by definition, that business loans above $50,000 count toward the cap. This number was not indexed and has not been adjusted for inflation in the 15 years since enactment, which erodes the de minimis level, he pointed out.
"Where many vehicle loans or small lines of credit may have been initially exempt from the cap in 1998, many of these types of loans that meet the needs of small business today are now impacted by the cap due to this erosion," Farmakides testified. "To put this in perspective relative to inflation, what cost $50,000 in 1998 costs $71,639 today, using consumer price index data. That is a change that is completely ignored by current law and greatly hamstrings a credit union's ability to meet its members' needs."
According to Farmakides, the "mere existence" of a member business lending cap acts as a deterrent for credit unions to start an MBL portfolio, knowing that as their program thrives they will face this "arbitrary threshold" and may have to turn members away. Furthermore, he noted those credit unions that do have an MBL program are disincentivized from offering working capital lines of credit given that, regardless of whether or not the line of credit actually is drawn, it still counts against the cap.
"As members of the subcommittee are aware, working capital lines of credit are critical to small companies as a way to meet day-to-day cash shortfalls and manage the needs of a growing business," he testified.
His appearance continued a credit union lobbying blitz on Washington this week, following Congressional testimony by two other credit union CEOs.
Rose Bartolomucci, Towpath CU, Akron, Ohio, on Wednesday
SBA Lending Partially Exempt
Farmakides told the Subcommittee the government guaranteed portions of Small Business Administration (SBA) loans do not count toward the member business lending cap, but the non-guaranteed portions do.
He said this could lead to a situation where a credit union may be an excellent, or even preferred, SBA lender, but eventually will have to scale back participation in SBA programs as it approaches the "arbitrary" cap.
"This would likely hit SBA Express or Patriot Express loans first, as those have lower guarantees and thus may have a bigger impact on money available below the cap," Farmakides testified. "As you know, Patriot Express loans help give our nation's veterans more opportunities after they return from serving our country. The member business lending cap can deter the availability of those opportunities."
Keeping up the theme of lobbying for regulatory relief, Farmakides declared the "ever-growing regulatory burden" being placed on credit unions "also serves to hamper the ability of credit unions to make business loans, as capital is diverted from lending to compliance costs."
Lafayette FCU's Lending Experience
After informing Subcommittee members that a November 2013 survey of NAFCU members found member business lending is expected to grow over the next 12 months, Farmakides told them Lafayette FCU has seen a need arise from its small business members to get lines of credit they have lost from other lenders. As a result, he said, the CU has expanded its focus into this area in 2013.
"While our credit union proudly meets our local communities' lending needs, the arbitrary member business lending cap is now having a direct negative impact on how well we can serve our members," he noted. "Many small businesses come to us looking for large lines of credit to help them meet cyclical challenges. However, any line of credit above $50,000 counts toward our member business lending cap, even if the funds are not extended. This fact hampers our ability to meet the needs of many of our small business members."
So far in 2013, he continued, Lafayette FCU has done 10 commercial and industrial member business loans averaging approximately $61,000 each, which he said is evidence that most are considered small but are still "large" enough to count against the "arbitrary" cap. Many of the CU's loans in this area tend to be lines of credit advances aimed at financing for cash flow purposes or startup costs, he said.
"It is worth noting that Lafayette takes our MBL program very seriously and we have recruited the appropriate personnel with the appropriate experience to ensure it is sound and successful," he testified. "While others in the financial services industry may claim credit unions are not sophisticated enough or able to attract the correct personnel to make member business loans, this is simply a misnomer."
