Shelby noted that 20 of the 55 credit unions that failed in 2009 and 2010 made business loans. Matz explained that only one of the failures was primarily caused by problems in the business loan portfolio.

Committee Chairman Tim Johnson (D-S.D.) expressed concern about the increase in business loan charge-offs and the resulting supervisory concerns.

Matz conceded that charge-offs had increased during the financial crisis but noted that in the last quarter they had declined. And she noted that delinquent loans don't necessarily result in a loss if they have been well-collateralized.

Matz said that as many as 2,000 more credit unions might get into business lending if the cap were increased. She explained that many credit unions are reluctant to do so because business lending programs are expensive to set up and current limits don't allow enough return on investment to make it cost effective.

Sen. Robert Menendez (D-N.J.) said while he is a supporter of credit unions, he is concerned about the possibility of increasing business loans, especially if it is at the expense of consumer lending. He also asked whether increasing business loans would increase the advantage that credit unions already have from being tax exempt.

Matz replied that credit unions are already very heavily regulated on numerous levels and her agency would beef up its regulation of business loans if credit unions were allowed to make more of them.

At the hearing, which took place a week after banks and credit unions were comrades in arms on delaying new interchange rules, they resumed their positions as antagonists on the question of whether credit unions should be allowed to make more business loans.

"Raising the cap on business loans would make credit unions into tax-exempt banks," ABA Chairman Stephen Wilson told the panel.

CUNA President/CEO Bill Cheney said increasing the cap would help create more jobs and that the credit unions' tax-exempt status was to encourage them to serve the underserved. That status doesn't mean credit unions should be at a disadvantage in areas such as business lending, he added.

Independent Community Bankers of America Board Member Noah Wilcox told the panel that if credit unions want to make more business loans, they should pay taxes and comply with the Community Reinvestment Act, just as banks do.

Johnson asked NAFCU Chairman Michael Lussier how credit unions would manage the additional risk that comes from business loans.

Lussier, president/CEO of Webster First FCU in Worcester, Mass., said that most business loans are small, between $50,000 and $250,000, and his credit union is careful about the individuals it lends to.

In response to a question from Shelby (R-Ala.), Lussier said he would support including a provision in the bill to only allow CAMEL 1 and 2 CUs to increase their business lending.

Under the Udall bill, eligible credit unions will be able to increase their small business lending to 27.5% of total assets, at a rate of growth not to exceed 30% a year. Credit unions must be well-capitalized, be at or above 80% of the current cap, have five or more years of member business lending experience and be able to demonstrate sound underwriting and servicing.