Former SBA Executive and now Lafayette FCU CEO Hearne Continues to Press Congress to Remove MBL Barriers

WASHINGTON – With nearly 10 years of experience at the SBA, Michael Hearne, president/CEO Lafayette FCU is in a keen position to tell Congress about the barriers that credit unions face when starting member business lending programs. Speaking on behalf of CUNA, Hearne, who heads the $304 million, Kensington, Md.-based credit union, shared a number of regulatory limitations at a March 17 House Small Business Committee’s Subcommittee on Regulatory Reform and Oversight roundtable. Hearne, who also testified in Congress on small business issues in April, said that credit unions often fill a void left by banks, particularly when it involves lending to the self-employed. “Small businesses are the engine of economic growth – accounting for about one-half of private non-farm economic activity in the U.S. annually,” Hearne said. “Their ability to access capital is paramount. But this access is seriously constrained by the double-whammy of banking industry consolidation and the Credit Union Membership Access Act-imposed limitations on credit union (member business loans).” Hearne told Committee members that prior to 1998, there were no statutory limits on credit union member business lending until the passage of CUMAA imposed the 12.25% of assets MBL cap. Hearne has extensive knowledge of business lending, having worked for SBA’s Office of the Chief Financial Officer for seven years and supervised the agency’s Financial Improvement Plan, which resulted in the development of the current financial data structure and all credit program subsidy models. After the SBA, he worked as an independent consultant with SBA lenders to analyze their loan portfolios. He also provided SBA loan sale bidders with historic performance analyses to aid in developing their bids. With CUNA, he helped to develop a business lending program that would assist “well managed” credit unions to make member business loans and SBA 7(a) loans. Hearne provided an example of some of the costs incurred for an MBL startup: $100,000 for a “typical experienced mid-level commercial loan officer;” funding costs; and overhead and startup costs such as data processing systems, furniture and equipment, printing, postage, telephone, occupancy, credit reports and other operating expenses. “Assuming credit unions could carry salary expense of 2% of portfolio, 76% of credit unions couldn’t afford to be active member business lenders even if they had portfolios that were equal in size to the current 12.25% of asset maximum,” Hearne explained. The MBL cap is also not based on safety and soundness considerations, Hearne said. “There is no safety and soundness reason that net worth above 7% cannot also support business lending,” Hearne said. “If all net worth could be counted, the actual limit would average between 18% and 19% of total assets rather than 12.25% of total assets.” The current $50,000 threshold, initially established in 1993, for defining an MBL is “too low” and discourages credit unions to make loans to smaller businesses because they have to set up a formal member business lending program in compliance with all the requirements of Section 723 of the NCUA’s regulations, Hearne added. NCUA was poised to adopt a $100,000 threshold by regulation in 1998 until CUMMA incorporated the $50,000 regulatory definition into statute that year. “Simply adjusting the $50,000 threshold for inflation would result in an approximate 33% increase in the threshold to over $65,000,” Hearne offered, adding “permitting the threshold to rise to $100,000 would open up a significant source of credit to small businesses.” According to NCUA call report data, at mid-year 2004, the dollar amount of MBLs was less than one-half of one percent of the total commercial loans held by U.S. depositories. Credit union MBLs represent 3.1% of the total of credit union loans outstanding, and only 17.9% of them offer MBLs. The median size of credit union MBLs granted in the first six months of 2004 was $140,641. “An almost two-thirds increase in credit union MBL limits – from 12.25% to 20% of assets, equivalent to the business lending limit for savings institutions – would not cause these numbers to change dramatically,” Hearne said. Regarding the SBA’s 7(a) loan program, Hearne said CUNA is concerned about sufficient funding here and urged Congress to reconsider providing allocation; asked the SBA to streamline the approval process and to insure that regional offices are current on all SBA policies, including those on credit unions’ access to SBA lending. [email protected]