The credit union industry may have its best chance in more than a decade to persuade Congress to double the amount of business lending it can do.
With banks making fewer business loans and lawmakers eager to spur job creation without expanding the deficit, credit union advocates say the industry can pick up the slack if Congress lifts the 1998 restriction that bars individual credit unions from holding business loans in excess of 12.25% of total assets.
The industry estimates that greater commercial lending authority would free up $10 billion of new business loans and in turn create more than 100,000 jobs in its first year.
"We're trying to stimulate small business, yet we're ignoring one group of financial institutions that have the money to lend and are interested in business lending and can manage it as effectively as they've managed their other lending," said Fred Becker, the president of the National Association of Federal Credit Unions.
But the political case may be undermined by an economic one. Credit unions, like community banks, are struggling under a mountain of bad loans.
Yearend data released last week by the National Credit Union Administration shows that the number of troubled credit unions is growing.
As of Dec. 31, 351 credit unions had Camels ratings of either 4 or 5, up 30% from the end of 2008. And the picture is worse at the larger institutions. The number of credit unions with assets of $100 million to $1 billion and Camels ratings of 4 or 5 shot up 230% in 2009, to 66. Four credit unions with more than $1 billion of assets slipped into troubled status in 2009.
NCUA call-report data shows that, in aggregate, fewer credit unions are collecting on their loans. The industry's loan delinquencies grew to 1.82% through the fourth quarter of 2009, up from 1.38% a year earlier. Lingering exposure to the real estate market last year triggered a record number of credit union failures, while mergers claimed 221 credit unions. Over the past two years the number of credit unions has dropped by 6.75%, to 7,554.
While still a small fraction of the total market, credit union business loans increased 9.8% in 2009, to around $36 billion. According to the NCUA, business loans more than two months delinquent shot up 80.3% in 2009, to $1.2 billion.
But while credit unions are not immune from weakened lending conditions, industry advocates point out that credit union business loans have grown faster and performed better than those of banks.
The credit union industry is considered well capitalized; its net worth ratio fell to 9.91% at yearend, from 10.61% a year earlier.
"What we've been saying all along is that credit unions have the capital to lend," said Ryan Donovan, the Credit Union National Association's vice president of legislative affairs. "Our chief obstacle is not capital, it is the statutory restrictions."
Opponents of expanding credit union business lending say those ratios do not paint an accurate picture. Because credit unions cannot issue stock to generate new capital, and instead must rely on retained earnings, credit unions are at particular risk in an abrupt downturn.
"They really need to keep a larger capital cushion," said Keith Leggett, a senior economist at the American Bankers Association. "Even though the credit union industry is, overall, very well capitalized, what you will find is that capital can be very quickly diminished, especially if you have large loans that go bad."
One crucial provision in the business lending legislation would increase, to $250,000, the size of business loans that are exempt from loan portfolio restrictions.
Currently, credit union business loans smaller than $50,000 do not count against the 12.25% cap. The average credit union member business loan is currently $210,000.
"If you're talking about not counting those loans as business loans, then the concentration in the credit union portfolio would be much higher," said Alan Theriault, the president of CU Financial Services, which helps credit unions convert to bank charters. "It's really critical that risk be managed with an accurate reflection of what's in the balance sheets of these institutions. … Otherwise you're just hiding the ball."
Credit unions contend the current cap is arbitrary, a concession made to banks without regard to risk.
"We want to give CUs options, and for them to have the ability not to say 'no' when the member walks through the door," said Tun Wai, chief economist at the NAFCU. With the cap "you're not even considering whether the member is viable or not, [because] you bump up against a hard, fast line."
But with the White House fixated on jobs, the stars could be aligned for legislation to raise the cap on business lending by credit unions.
Two bills, one sponsored by Rep. Paul Kanjorski, D-Pa., and a Senate version introduced by Sen. Mark Udall, D-Colo., would double the current cap from 12.25% of total assets to 25%.
"If we lift the cap on business lending … quickly, we can inject into the system $10 billion this year and create 108,000 jobs," Kanjorski said, speaking last month at the CUNA's governmental affairs conference. "And taxpayers won't be on the hook for one dollar."
The Kanjorski and Udall bills have garnered the support of business associations including the National Association of Realtors, the National Small Business Association and the National Association of Manufacturers.
Though support in the House is strong, Financial Services Committee Chairman Barney Frank, D-Mass., told the CUNA conference that the bill faces long odds in the Senate.
"Unless there is some prospect of the Senate acting it will be very hard for me to persuade members of the House to vote for a controversial initiative particularly as November approaches, so you have a big lobbying job to do," Frank said.
Bankers have long opposed the expansion of business lending by credit unions, arguing that amending the cap for the federally tax-exempt lenders is akin to financial mission creep.
Instead of attracting new borrowers, credit unions would merely displace existing lenders, bankers argue.
"They have a 35% or 40% tax advantage, so they would clearly be crowding out the existing lenders," said Paul Merski, chief economist at Independent Community Bankers of America.
Bankers also say that if restrictions that separate credit unions and banks erode, then the credit unions' tax exemption should be revoked.
"What's the differentiation between credit unions and banks? And if there isn't any, then this would have to raise questions about why they continue to get preferential tax treatment," Leggett said.
The argument that credit unions could boost business lending might trump any fears that the industry is not strong enough.
"There is a real need for small-business lending," said John Magill, the CUNA's senior vice president of legislative affairs, who views the industry's best odds as coming on a bill redirecting $30 billion in repaid Troubled Asset Relief Program funds to spur business lending at community banks.
"If the banks aren't doing the lending, the arguments against credit unions having additional powers go away," he said.