Credit Unions feel stymied by lending limitations


Nick Irons, left, owner of Irons Fitness, with Dave Taylor, a strength coach, in Bethesda. Irons was able to start his personal training studio with a loan from Mid-Atlantic Federal Credit Union in Germantown. (Jeffrey MacMillan/Capital Business)

After five years as a personal trainer, Nick Irons was ready in 2010 to open his own fitness studio in Bethesda. His search for financing took him from behemoth HSBC to community lender EagleBank. Problem was every bank he approached turned him down. ¶ Irons was bewildered. ¶ “My business was successful before I decided to open a studio, but most banks looked at it as if it were a brand new start-up, not an extension of an existing business,” he said. ¶ Financial institutions are often leery of lending to fitness companies because of the failure rate, but Irons figured his years of experience and lengthy client list would make him a viable candidate for a loan. ¶

Determined to expand his operations, he began asking friends and colleagues for recommendations of lenders and was directed to Mid-Atlantic Federal Credit Union in Germantown. As a resident of Montgomery County, he was eligible for membership in the financial cooperative, and joined. After a multilayered application and review process, Irons was approved for a loan of around $250,000.

The financing helped him purchase exercise equipment and retrofit commercial space on Wisconsin Avenue to house Irons Fitness. He hired four trainers and a dietician, who today see a total of 70 clients.

“They wanted to get to know me as a businessperson, just as much as they wanted to know the nuts and bolts of the business,” Irons said.

Irons was lucky. If he approached Mid-Atlantic FCU today, President Richard A. Wieczorek Jr. said he might have walked away with another rejection.


Richard A. Wieczorek Jr., president of Mid-Atlantic Federal Credit Union, said his institution has pulled back on making business loans because it is nearing a federally mandated cap. (Jeffrey MacMillan/Capital Business)

Mid-Atlantic has had to pull back on making loans because it is nearing a federally mandated cap on business lending.

That cap is at the center of a contentious fight between the credit union and banking industries, one that may come to a head this year as Congress considers raising the limit. Legislation, now before the Senate, proposes to increase from 12.25 percent to 27.5 percent the amount of total assets a credit union can lend to businesses.

Banks, by comparison, are not governed by any hard and fast cap. However, regulators keep vigilant watch over their exposure to various types of commercial loans.

Credit union trade groups say financial cooperatives are flush with deposits, coming off of a banner year of membership gains, and need more flexibility to deploy that cash.

Banking groups argue that credit unions, whose tax-exempt status helps them offer lower interest rates, are trying to gain an unfair advantage in the market. Raising the cap, they contend, will be lucrative for a few large cooperatives at the expense of taxpayers and the revenue-hungry federal government. What’s more, bankers say it would be unreasonable to change regulations to suit an industry that was never meant to mimic commercial banks.

Demand for loans grow

As long as small-business owners, such as Irons, have difficulty securing loans from banks, credit union advocates feel justified in demanding more leeway to lend, especially as cooperatives are recording increased activity.

Lending to mom-and-pop shops climbed 5.8 percent over the prior year to $37.8 billion in the first quarter, according to the National Credit Union Administration, a regulatory agency. During the same period, the Federal Deposit Insurance Corp. recorded a 3.7 percent decline to $584 billion in small business lending at banks.

“Demand for loans really started to ramp up as the recession subsided,” said Wieczorek of Mid-Atlantic FCU, a $260 million credit union with nearly 10 percent of its assets listed as business loans. “But the cap prevents us from doing larger deals because we must stay within the limits. It’s an impediment to putting our deposits to work.”

Mid-Atlantic is one of 151 credit unions nationwide that are within 80 percent of the limit, according to the NCUA. Of the 7,019 federally insured credit unions 2,200, or 31 percent, engage in business lending.

Opponents of lifting the lending cap point to the relative small number of institutions nearing the ceiling to illustrate how inconsequential the issue is to a majority of credit unions.

“Ninety-nine percent of credit unions are no where near their cap — this is a special interest issue,” said James Ballentine, chief lobbyist for the American Bankers Association. “You can’t fight for something that doesn’t apply to the masses. If it only helps a handful, then Congress certainly should not be going down this road.”

NCUA Chairwoman Debbie Matz said she knows many credit unions that refuse to invest time and effort in business lending because of the limitations in place.

“There are even credit unions that maybe make a few loans, but they don’t advertise it because they don’t want to turn away business,” she said. “We’re estimating that increasing the lending cap would produce at least $5 billion in new credit for small businesses.”

Supporters of the legislation say the increase in lending would lead to the creation of 120,000 jobs within the first year of enactment, an estimate banking groups dispute.

“They wouldn’t be creating any new business loans; they’d only be cherry-picking loans that a community bank would already make. So they’re not creating any new jobs, just shifting loans from one place to another,” Ballentine said.

He went on to point out that credit unions can lend to mom-and-pop operations through the Small Business Administration. Loans guaranteed by the SBA do not count toward the cap.

Lending alternatives

But Larry Kelly, chief executive of Fairfax-based Apple Federal Credit Union, questions why credit unions should be limited to SBA loans, especially when many businesses may not qualify.

“Our members deserve a full range of options, but the cap is constraint on our lending program,” he said. “Just the compliance costs alone for business services are tremendous, so you need economies of scale to continue to offer the services.”

Catoctin Lighting Services, a lighting distribution and consultant outfit in Frederick County, did obtained a SBA loan through Mid-Atlantic FCU in September. Still, the company’s Vice President Allison Richards said she feels credit unions should have as broad a range of lending options as desired, since they are more “attuned to the needs of small businesses.”

Richards and her husband, Jim, have run Catoctin Lighting for 16 years, but faced dwindling sales as the recession stalled business. With little cash flow, the couple began relying on credit cards to keep the business afloat. But the 29 percent interest they were paying on the card was crippling.

“No bank would even entertain the possibility of helping us, not Bank of America, not M&T,” Allison Richards said. The loan from Mid-Atlantic FCU allowed the Richardses to refinance their debt to a lower interest rate of 6 percent. “The loan and the working capital has made it much easier for us to hire an additional employee as business has picked up.”

Bumping heads with community banks

To be sure, Washington area banks, mainly community institutions, are lending. Locally based banks, in the most recent quarter, grew their loan portfolios by $269 million, or 2.1 percent, from a year ago.

Analysts say community banks will bear the brunt of any changes to the credit union cap as smaller institutions are competing for the same customers. As a result, the loudest opposition has come from banks with less than $5 million in assets.

They not only have the backing of the ABA, but also the lobbying power of the Independent Community Bankers Association. Together they successfully killed similar legislation to raise the cap in 2010, and may repeat the performance this time around.

The Small Business Lending Enhancement Act of 2011, introduced by Sen. Mark Udall (D-Colo.), has languished in the Senate Committee on Banking, Housing and Urban Affairs for a year as members are unable to come to a consensus.

“Every day of delay results in a delay in credit unions ability to get the economy back on an even keel and restore jobs,” said Fred R. Becker Jr., president and chief executive of the National Association of Federal Credit Unions.

In March, Senate Majority Leader Harry Reid (D-Nev.) promised the legislation would come to a vote this year, though no specific date has been announced. Were Reid to bring the issue to the floor he could bypass the committee an expedite the process.

Meanwhile, community bank advocates say credit unions should be stripped of their tax-exempt status to level the playing field, a measure that has been bandied about by the Obama administration.

Two years ago, the administration considered imposing corporate taxes on credit unions as part of a broader review of tax reform measures. Though the suggestion never amounted to any action, credit unions remain concerned, said Peter Duffy, managing director at Sandler O’Neill & Partners, which works with credit unions and banks.

Beyond the cap

In his dealings with credit unions, Duffy said he has found a majority are more worried about access to capital and removal of certain membership restrictions than a higher lending cap. Indeed, a coalition of some 4,000 credit unions have been pressing Congress to allow them to issue additional forms of capital to supplement their retained earnings, or the net income credit unions hold onto rather than distribute in the form of dividends.

As it stands, credit unions must maintain a net worth ratio — retained earnings as a percentage of total assets — of at least 7 percent to be considered “well capitalized.” Accepting new share deposits without simultaneously growing retained earnings could upset that ratio, and trigger a number of restrictions.

Legislation, introduced by Reps. Peter King (R-N.Y.) and Brad Sherman (D-Calif.) in February, to amend the regulation is stalled in he House Committee on Financial Services.

Kelly from Apple FCU agrees that lack of access to capital is as “bigger constraint” for a broader number of credit unions than business lending. Getting the capital rules changed, he said, “appears almost insurmountable at times ... but we’re gaining traction with the business lending cap. It’s all important.”

Danielle Douglas-Gabriel covers the banking industry for The Washington Post.
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