The importance of member business loans to members of modest means

<p>NAFCU has spearheaded efforts to restore the pre-Credit Union Membership Access Act authority to provide loans to members for business purposes – eliminate MBL limits established by the 1998 statute – and remove the current roadblock to full participation of federally insured credit unions in the Small Business Administration’s (SBA’s) 7(a) guaranteed loan program. To no one’s surprise, these efforts have raised the strong ire of the banks. Additionally, during Senate Banking Committee confirmation hearings for NCUA Board Members JoAnn Johnson and Deborah Matz, Chairman Paul Sarbanes (D-Md.) and ranking member Senator Phil Gramm (R-Texas) left no doubt that they felt member business lending could lead credit unions away from their “original mission” while bringing into question the tax exemption if credit unions begin to look more like banks. The obvious question is why pursue this path given the number of red flashing lights ahead while at the same time federally insured credit unions as a whole are simply not active in this market. The answer is to stay ahead of the curve in providing the maximum legislative and regulatory flexibility for credit unions to serve their members. Who are the members we want to serve with this type of lending? In a survey of credit unions reporting member business lending, the Treasury Department found that 45% of member business loans were made to members with household incomes of less than $50,000. For any credit union that has or will adopt an investment area or for community chartered credit unions in general, member business lending may be the best way to serve a critically important segment of members – the underserved. When we talk about credit union business borrowers, we are talking about farmers, taxicab drivers, and other small businessmen and women who need to purchase equipment that will allow them to become self-sufficient and support their families. The Treasury study showed that 59% of CU member business loans were for less than $50,000. And these loans are used to fund purchases vital to businesses – primarily service and agricultural businesses or rental properties. Of credit union business loans, about half are secured with real estate, 12% with agricultural collateral-such as land, equipment, crops and livestock-and 23% are secured by taxicab medallions. Our current strategy is to take one red light at a time and turn it green. The Small Business Administration Act authorizes participation by financial institutions in the SBA’s general loan programs facilitating government-guaranteed loans to small businesses. These programs are provided for under Section 7(a) of the act. However, the SBA has interpreted the statute to authorize full participation in its programs only by institutions that are open to the general public and that only credit unions having community-based charters meet this standard. We have been lobbying both the SBA and Congress in order to change SBA’s flawed interpretation. The NAFCU Board of Directors as a group met with the then Acting Administrator of the Small Business Administration, John Whitmore, last May; and in January Fred Becker, NAFCU’s Director of Regulatory Affairs Gwen Baker and I personally met with his successor, Hector Barreto, to make our case. NCUA Chairman Dennis Dollar is also a critically important advocate of credit unions’ full participation in the SBA guaranteed loans program, and at his direction NCUA General Counsel Robert Fenner has been in contact with his counterpart at the SBA seeking to break the SBA’s administrative logjam. In December NAFCU’s persistent lobbying efforts on the Hill paid off with a bi-partisan letter signed by 12 representatives that urged Administrator Barreto to take an “immediate step that would prove beneficial to our nation as a whole and our nation’s small businesses in particular . . . [by] extend[ing] to our nation’s federally-insured credit unions the same authority to offer SBA guaranteed loans enjoyed by other federally-insured lenders.” We were also able to secure a provision in the American Small Business Emergency Relief and Recovery Act of 2001 (H.R. 3230) to allow credit unions to participate in SBA’s emergency loans guaranteed program, but the provision did not make it to the President’s desk. A provision in the current House regulatory relief legislation – The Financial Services Regulatory Relief Act (H.R. 3951) – would exclude from the MBL calculation loans to nonprofit religious organizations. The provision started out as separate pieces of legislation introduced by Congressman Ed Royce (R-Calif.) in the 106th and again in the 107th Congress. NAFCU supports the provision as an important first step in eliminating the MBL restriction entirely. I firmly believe that credit union business lending will always be a small, but important part of credit union lending. The heart of credit union lending for the foreseeable future will remain real estate and auto lending, $132 billion and $127 billion respectively at yearend 2001. Total member business loans came in at $5.4 billion or 1.6% of total federally insured credit union lending at yearend 2001. Real estate and auto lending combined account for nearly 80% of all loans. How does the amount of credit union business lending compare to the banks? At yearend 2001, the FDIC reports banks held $982 billion in commercial and industrial loans. Credit union member business lending is approximately one-half of one percent of the business lending done by commercial banks. The Treasury study found that credit union member business lending poses no material risk to NCUSIF, represents a niche market for credit unions and is not a “threat to the viability and profitability of other insured depository institutions.” I believe that this assessment will remain constant over time, making bankers’ concerns baseless. However, for credit unions active in this market and for credit unions that really want to address the need of underserved areas, loans to members for business purposes may be the most important loans that a credit union makes. The current limit on MBLs is not justified and NAFCU will work hard over the long-term to turn those red lights to yellow and then to green.</p>