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CU Execs Hopeful of MBL Cap Hike

April 6, 2011

The nation's credit unions are hoping the second time's a charm when it comes to lifting the cap that restricts their ability to make new business loans - the vast bulk of which are secured by small-cap commercial properties.

Small-balance borrowers clearly have a significant stake in the prospective cap hike as well. The primary credit union trade group projects that such an adjustment would generate some $13 billion in new small business lending during the first year of implementation.

Whether Congressmen and Senators can resist considerable pressure from the banking industry and double the business-lending capacity of member-owned co-operatives: stay tuned.

Bills with considerable support in both the U.S. Senate and House of Representatives last year would have more than doubled the prevailing member business loan (MBL) cap, from 12.25 percent of a given credit union's total assets to a maximum of 27.5 percent.

But that legislation was dropped from the Small Business Jobs Act president Obama signed last September, and Congress ultimately adjourned without taking any action on it separately.

However as often happens, the proposal is getting another go-around in the 112th Congress. Sen. Mark Udall (D-Colo.) last month introduced legislation (formally dubbed S.509) pretty much mirroring provisions proposed in 2010. Sen. Udall offered S. 509 as a stand-alone bill, and alternatively as an amendment to S. 493, the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Reauthorization Act of 2011.

More specifically, in order for any of the nation's roughly 7,800 state and federally chartered credit unions to qualify for the 27.5 percent cap, they'd have to (among other provisions):

  • Be capitalized with at least a 7 percent net worth ratio;
  • Have outstanding MBLs of at least 80 percent of the current cap for a year;
  • Boast five or more years experience in MBLs and demonstrate sound loan underwriting and servicing; and
  • Expand their MBL portfolios by no more than 30 percent in any given year.


According to data the Credit Union National Association provided SmallBalance.com, it's pretty clear a lot of credit unions are facing cap pressure. Outstanding MBLs at more than 350 of them have reached 7.5 percent or more of assets - half of them 10 percent or higher. These institutions collectively represent 55 percent of the sector's business lending subject to the cap.

CUNA chief economist Bill Hampel and senior economist Mike Schenk caution that as these lenders reach the cap, business lending is bound to slow from the blistering 23 percent average annual MBL growth seen during the 21st Century's first decade.

And quite a few other credit unions that aren't active business lenders would jump into the game as well, stresses veteran credit union figure Ron Barrick, president/CEO of Advantis Credit Union in Portland, Ore.

For many of these institutions, the current percent cap just doesn't provide sufficient scale to justify the considerable costs of the infrastructure required to appropriately underwrite, process and service CRE and other business loans, elaborates Barrick, who is also a member of the Federal Reserve Bank's 12th District Community Depository Institutions Advisory Council.

"With the cap at 12.25 percent, it just doesn't allow for the scale many institutions need to be effective business lenders," Barrick continues. "You need to know you can put out enough dollars" to justify the corresponding infrastructure expenses."

As for Advantis, outstanding MBLs currently translate to about 9.5 percent of assets, meaning its ability to meet growing demand for business loans is becoming squeezed, Barrick laments. Advantis has been active lending against smallish apartment complexes, as well as user-owned and income-generating office, retail and industrial properties.

The bigger picture is that cap-restricted credit unions, for-profit banks and other lenders just aren't meeting ever-recovering small-balance CRE and small-business credit needs, Barrick relates. Indeed the CUNA economists note that while credit union MBL activity increased by 7.6 percent last year, outstanding community bank commercial loans declined by 1.5 percent even while 40 percent of surveyed small business owners indicated their credit needs aren't being met.

Accordingly, a higher MBL cap "is flat-out good public policy that will provide more credit to small businesses than is currently available," Barrick stresses.

CUNA calculates that small businesses and real estate investors would borrow an additional $13 billion from credit unions during the first year under a 27.5 percent MBL cap. President/CEO Bill Cheney also estimates this additional funding would create some 140,000 new jobs, based on a new position created with each $92,000 in estimated additional MBL lending.

As for passage prospects this time around, Cheney and other CUNA higher-ups remain confident the Senate will consider increasing the cap this session, as lawmakers aren't as pressed with other legislation as they were last year.

"Credit unions do not need taxpayer money to lend more to small businesses," Cheney stresses. "They need the authority from Congress to do so."

Barrick for his part knows all too well that the banking lobby will once again pressure its Congressional supporters to kill a bill promising more competition for community banks. But he counters that more competition among lenders is good for borrowers.

"Small businesses are the biggest winners under this legislation."

Barrick also notes that Treasury Department officials came up with the bulk of the "prudent" capitalization, underwriting and other soundness-related stipulations. The proposed legislation has the Obama administration's support, not to mention a dozen-plus original co-sponsors in the Senate.

"So I think its chances are pretty good," Barrick concludes.

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