Credit unions seek to cash in on lending

Credit unions want in on small-business lending, where local and regional banks typically make a big chunk of their profits.

Each year, credit union lobbyists renew a push for federal legislation to increase the federally mandated cap that limits the amount of business loans credit unions can make to their members. And each year that push is met with opposition from the banking industry and its lobbyists.

In hearings this year, credit union lobbyists argued that an estimated $10 billion and 100,000 new jobs could be injected into the U.S. economy if Congress passed the bill to increase the cap on credit union business lending from 12.25 percent of their total assets to 25 percent.

Karin Sherbin, director of governmental affairs at the Virginia Credit Union League, said their projections show 2,500 jobs would be created in Virginia if the cap were raised.

“From our perspective, it seems like a win-win for everyone,” Sherbin said. “It doesn’t cost the taxpayer a dime, and it injects into the economy.”

But bankers disagree about the costs to taxpayers because of credit unions’ federal tax exemption.

Pat Satterfield, president of the Richmond-based Virginia Association of Community Banks, argued that any loans made by credit unions “are basically taxpayer subsidized loans because of the credit union tax exemption.”

The beef between the two sides also stems from the fact that small-business lending has always been the bread and butter of small and medium-size community banks, of which there are about 100 in Virginia.

“This is a further infringement upon our turf,” said Billy Beale, CEO of Union First Market Bankshares, the Richmond area’s largest bank holding company.

“Credit unions want to be community banks, and Congress is letting them.”

Those that particularly draw criticism from the banking lobby are multibillion-dollar credit unions with broad community charters that allow them to offer membership to just about anyone. Bankers see such charters as an expansion of power beyond what Congress intended when it gave credit unions their tax exemption in exchange for serving people of “like-kind,” particularly those of modest means.

Richmond is home to Virginia Credit Union, a $1.9 billion institution with a broad charter.

According to spokesman Glenn Birch, Virginia Credit Union is in favor of raising the business lending cap, but it ironically, as one of the largest credit unions in the state, does not engage in any business lending.

In making their case against raising the cap, banks also argue that credit unions don’t have the experience or expertise to properly underwrite strong business loans and would thereby jeopardize the economy because of the possibility of defaults.

But the Credit Union National Association released statistics recently that found credit unions have lower rates of business loan charge-offs than banks through the first three quarters of 2009. Credit unions during that time charged off 0.44 percent of business loans, while banks charged off 2.28 percent.

There is also some disagreement over whether a decrease in small-business lending at banks.

CUNA said credit unions experienced 11 percent growth in business loans between September 2008 and September 2009. Community banks reported a 7.3 percent decline in business loan growth, and the banking industry as a whole reported a 15.1 percent decline.

Beale, echoing the sentiment of many other bankers, argues that banks aren’t intentionally pulling back on small-business lending. Rather, there is a lack of qualified borrowers and a lack of demand because businesses are simply nervous about borrowing in this economy.

“The credit unions are using the perception that people aren’t making loans out there as an advantage to say, ‘If you give us these powers, we’ll make the loans,’” Beale said.

Beale said community banks are dealing with a lingering negative reputation left over from the bailouts of their larger counterparts.

“There is a general dislike for banks,” among the public, Beale said. “And Congress seems to want to do anything the banks don’t want to do.

Michael Schwartz covers banking for BizSense. Please send news tips to Michael (at) Richmondbizsense.com.

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