Credit unions push to ease small-business lending cap

adunn@charlotteobserver.comApril 8, 2012 

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Victor and Sarah Lytvinenko are the designers behind Raleigh Denim.

NICK PIRONIO

  • The main difference comes down to ownership. Banks are owned by their shareholders or investors, while credit unions are nonprofit cooperatives owned by their members.

    Customers must qualify for membership at credit unions through residency or other requirements. Credit unions also are exempt from federal income taxes.

When the time came late last year for David Settle to refinance a loan on his heating and air-conditioning company’s building, he had an exuberant suitor: Truliant Federal Credit Union.

In a week, the Shelby business was a credit union customer, taking the loan from the bank that originated it.

“They were ready to jump all over it,” he said. “I’ve never seen a loan close so fast.”

In the latest flare-up in historical tensions between credit unions and community banks, a number of the nonprofit financial institutions are pushing harder into small-business lending and are lobbying Congress for the ability to do more.

As a trade-off in a 1998 federal law that made it easier for people to qualify to join credit unions, Congress capped the total small-business lending they can do to roughly 12.25 percent of their assets.

Bills are pending in both the U.S. House and Senate that would increase the cap to 27.5 percent of assets. Supporters call the bills an important step to help small businesses hire.

Several North Carolina credit unions are bumping up against the cap or are coming close to doing so, and have joined the chorus asking to raise it. It’s not a new issue, but is getting one of its longest looks by the U.S. House and Senate this year as small-business lending has become a hot political topic.

Business owners like Settle are backing the effort, frustrated by tightened credit standards that have made bank loans more difficult to come by.

With small banks, Settle said, “It’s like their hands are tied. … Since 2008, the banks have not been that willing to work with people.”

But banks vigorously oppose lifting the cap. Bankers say they are willing to compete on a level playing field, but decry the advantage credit unions have in not paying taxes and not being subject to regulations like the Community Reinvestment Act, which requires banks to show they are equitably investing and lending in communities where they take deposits

In many cases, some small banks’ hands really are tied when it comes to some lending, by recovering balance sheets and more heavy-handed regulators in the aftermath of the financial and housing crisis.

Growing sector

Small-business lending is not a large part of the credit union industry, which has focused on consumer services like debit cards and car loans.

Collectively, credit unions hold about $40 billion in business loans – less than 6 percent of all small-business loans, according to the Credit Union National Association.

But the total is growing. In the last four years, as banks have largely shrunk their balance sheets, credit union business lending has grown more than 44 percent, said Dan Schline, the N.C. Credit Union League’s senior vice president of association services.

Credit unions say they’re not stealing business from the community banks, but instead underwriting loans that banks turned down.

“We are getting business that the banks aren’t eager to get,” said Joe Mecca, spokesman for Coastal Federal Credit Union, a $2 billion credit union based in Raleigh that lends around the state.

It has about $200 million in small-business loans on its books, and would be over the cap if it closed on all the loans in its pipeline, Mecca said.

“We have more demand than we’re capable of fulfilling,” he said.

One business customer, Triangle-based Raleigh Denim, has used a $10,000 loan in 2009 from Coastal Federal to become a rapidly growing, 24-employee company.

“We were able to grow this business in the middle of the credit crunch ... mostly because they were willing to work with us,” said co-founder and designer Victor Lytvinenko.

Other credit union business customers also say their loans have helped create or preserve jobs in North Carolina.

Joe Trettel, managing partner of Permatech Inc. in Graham, about 20 miles east of Greensboro, said he had laid off half of his 105 employees and was on the verge of going out of business when he was able to get a loan from Truliant Federal Credit Union. The aluminum product manufacturer is now back at full strength.

Jim Dobbins of Sharp Interiors Inc. in Winston-Salem said his bank dropped him in late 2010 and seven others turned him down as banks shed construction industry loans. His company, which brings in about $10 million per year, was picked up by Allegacy Federal Credit Union.

“I’m with a credit union because they were the only alternative I had,” Dobbins said. “Without them, I wouldn’t be here.”

Should the cap be increased, the N.C. Credit Union League projects an additional $200 million in loans to close, creating 2,100 jobs in North Carolina in the first year. Nationally, the Credit Union National Association says it would expect $13 billion in new investment, creating 140,000 jobs.

Opposition from banks

Banks are wary of giving credit unions more latitude to lend to businesses.

The credit unions with the most small-business loans are already bigger than a number of community banks, and have the advantage of being nonprofit.

“If they want to be a bank, they can convert their charters over to be a bank,” said John Hipp, CEO of NewDominion Bank in Charlotte. “What’s happened over the years is they want to continue to encroach on the banking industry, but they don’t want to pay taxes or abide by the same regulations.”

Business lending is also a relatively new pursuit for most credit unions, and bank associations warn that inexperienced underwriters could lend money to projects likely to fail. After all, the credit unions themselves say they want to lend to businesses that banks have turned down.

For example, Telesis Community Credit Union in California failed last month, suffering under the weight of ballooning business loan losses. A sizable portion of its business loan portfolio was in loans that originated out-of-state, including a shopping center in Florida, the industry group Independent Community Bankers of America said in a statement.

“As an industry, we complain a lot about the tightening loan standards. The reason is that regulators don’t want banks to fail,” said Jason Kratovil, vice president of congressional relations at ICBA. “So we’re going to grease the skids for another segment of the financial services industry to make these bad loans? It’s just not a good policy.”

Bipartisan support

The bills pending in Congress have bipartisan support. In the Senate, co-sponsors include Al Franken of Minnesota and Rand Paul of Kentucky, though neither senator from North Carolina has signed on as co-sponsor.

Five U.S. representatives from the state are backing the bill, including Democrat Larry Kissell and Republican Renee Ellmers.

“Congressman Kissell understands that businesses and individuals are still having a tough time getting access to capital,” spokesman Christopher Schuler said in a statement. “Credit unions can play an important role in helping to increase the access that our economy still direly needs.”

But credit union lobbyists say their efforts have been hindered by opposition from the banking industry, a significant contributor to congressional campaigns.

The bill was reintroduced in the Senate after being initially sent to a banking subcommittee where it was not expected to leave. Senate Majority Leader Harry Reid used a special procedure to make it eligible to go directly to the Senate floor.

It is expected to come to a vote this month.

Dunn: 704-358-5235 Twitter: @andrew_dunn

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