In legislation expanding credit union membership, Congress tried to do community banks a favor by introducing a limit on the nonprofits' business lending.

But community bankers contend the new cap is too high.

"If this was (Congress') idea of throwing me a bone, well, they can keep their bone," said William E. Martin, president and chief executive officer at Pioneer Citizens Bank of Nevada in Reno. "The restrictions are so nominal, they may as well not be restrictions at all."

This month President Clinton is expected to sign legislation allowing credit unions to serve employees of unrelated companies with fewer than 3,000 employees. The legislation passed both chambers of Congress by wide margins after a Feb. 25 Supreme Court decision required that all credit union members share a single, common bond.

To limit competition with banks and to confine credit unions to their principal mission of serving consumers, Congress agreed to limit business lending to 12.25% of of credit union's assets. However, lawmakers diluted the requirement by exempting all business loans below $50,000 from counting toward the cap.

Albert C. Kelly, president and chief executive at SpiritBank in Bristow, Okla., said credit unions have "no more business making commercial loans than health clinics have doing brain surgery. It's not what they do."

Other observers said credit unions simply do not have the expertise in evaluating loans or the sales culture to solicit new loans.

"It's doubtful that they'll be able to compete effectively," said Surendra K. Kaushik, a professor at Pace University in New York who has done extensive research on credit unions.

Community bankers are concerned about being undercut by credit unions, especially the larger ones. Given their tax exemption, credit unions can win business by offering better loan rates, Mr. Martin said.

Joseph M. Vich, president of Community Bank of Waterloo, Iowa, said his bank does not make automobile loans because it cannot compete on price with nearby John Deere Community Credit Union.

"I think the larger ones, if they choose, can be very strong competition," said Mr. Vich. "We're very concerned."

Credit unions control a small fraction of the business loan market. According to the Credit Union National Association, only about 15% of the nation's more than 11,000 credit unions even offer business loans. Commercial loans outstanding total $2.9 billion.

In contrast, commercial and industrial loans at banks and thrifts total nearly $838 billion-not including commercial real estate loans.

Still, the lending restrictions will affect some credit unions. Bill Hampel, CUNA's chief economist, said 144 credit unions already exceed the 12.25% lending cap, though about 40 of these will be exempt. About 60 more are already close to the limit.

"We've got credit unions that will have to stop making loans immediately," said Ronald G. Halvorsen, president and chief executive of the Wisconsin Credit Union League. "They may have to lay off loan officers and support staff, because they are already above the limit."

Credit unions already in violation of the new limits have three years to get into compliance, and some institutions will be exempt from the new rules entirely. Any credit union whose primary mission is to lend to churches or farms or for costly permits to operate taxicabs can ignore the lending caps.

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