With the banking industry wounded from the financial crisis, credit unions are hoping lawmakers will finally pass a bill allowing them to expand their business lending.

The credit unions scored a key ally last week, when Sen. Charles Schumer, D-N.Y., said he planned to offer a bill that would scrap a 1998 law capping credit union small-business loans at 12.25% of their total assets.

There is no companion yet in the House, and any such legislation could face an uphill fight. However, some industry observers argue that credit unions have a good chance, since banks, which have fought off credit union expansion bills in the past, are deeply unpopular in the current political environment.

"The banking industry is in a tough position. … I don't think they have the same pull that they have had historically," said Oliver Ireland, a partner at Morrison & Foerster LLP. "You have to conclude that lawmakers are unhappy with banks and not with credit unions. … It may work in their favor."

Credit unions have fought for more than eight years to repeal the law, winning the support of key House members.

The efforts have not gained much traction in the Senate, but credit union representatives hope Schumer's support will change that.

"The potential for its passage has never been better," said John P. Magill, senior vice president of legislative affairs for the Credit Union National Association.

"It is now backed by a very senior influential member of the United States Senate. He is for it. He sees the need for it, and his track record of getting things passed is strong."

Schumer made a case for the bill last week by citing the banking industry's woes.

"With so many large banks in bad shape," credit unions need to be able to offer more small-business loans, he said in a press release.

"The situation facing these businesses right now is much worse than a matter of them simply being denied new loans. They are being strangled by having existing lines of credit pulled. A threat like this to small businesses could upend the livelihood of millions of workers and be catastrophic for the larger economy."

Bill Hampel, the CUNA's chief economist, estimates that eliminating the cap could result in nearly $10 billion worth of loans in the first year, because of interest from credit unions close to the cap, as well as those that were scared away from the business because of it.

Banking advocates argue that the economic crisis is not a good time for credit union expansion.

"We need people who have experience and a track record in business lending, not novices," said Ron Ence, vice president of congressional relations for the Independent Community Bankers of America.

"It would be a gamble to expand those powers."

Schumer's support will bring significant clout to the bill, Ence said, but bankers hope lawmakers see expanding credit unions' business lending powers as undermining the tax exemption they receive in exchange for serving people of modest means.

"Senator Schumer is someone to be reckoned with, but I feel the stronger argument is against expanding it," he said.

"Our game plan is to point out the fundamental unfairness of their tax subsidy and the fact that their desire to expand their businesses in a challenging economy is simply about growing. It has nothing to do with why they were created."

Only a sliver of the 8,000 credit unions are within a percentage point of the cap, Ence said. "This will only help some of the bigger credit unions expand for expansion's sake, and we don't think that is justified."

Credit unions, which have long argued that the cap is arbitrary and antiquated, have attached a repeal to several bills over the years. In June the House passed the Credit Union, Bank and Thrift Regulatory Relief Act, which would have excluded business loans in underserved areas from the cap. The bill never gained traction in the Senate.

Other than saying credit unions would have to provide progress reports to Congress twice a year, Schumer did not offer details about what kind of legislation he is planning or when he will introduce it.

But even credit union advocates acknowledge the bill could easily be trumped by other priorities.

Fred Becker, the president of the National Association of Federal Credit Unions, said that even though he is grateful for Schumer's support and thinks an elimination of the cap will help in the long run, credit unions are dealing with bigger issues.

Beyond any problems on their own balance sheets, credit unions are facing a National Credit Union Administration assessment of 0.5% of their net worth to replenish the industry's insurance fund after the bailout of U.S. Central Federal Credit Union, which posted a $1 billion loss in January from writedowns on mortgage-backed securities.

Several other corporate credit unions are also facing securities writedowns.

The assessment could wipe out a significant portion of this year's revenue for credit unions, Becker said, and a bill allowing bankruptcy judges to reduce mortgage debt could also hamper the industry.

Still, he said eliminating the cap would be helpful.

"We still see this as a shovel-ready, no-cost way to stimulate small businesses," Becker said. "We are hopeful that others in the Senate as well as the House will follow his leadership and recognize the benefit that this would provide to the economy."

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