Credit unions seek larger share of business loans

By Binyamin Appelbaum
Washington Post Staff Writer
Tuesday, February 9, 2010

The names of small businesses seeking loans are scrawled across a whiteboard in the Bethesda offices of Mid-Atlantic Financial Partners: A Denny's franchisee with plans for a new restaurant, the owner of a limousine fleet hoping to consolidate his auto loans, a government contractor seeking a line of credit to fund expansion, the owners of a medical office building in Leesburg looking for a mortgage.

Most of the businesses came here after their requests for financing were rejected by one or more banks. Mid-Atlantic is not a bank: It is mostly owned and funded by a local credit union, Mid-Atlantic Federal Credit Union. And at a time when banks are making fewer business loans, Mid-Atlantic is expanding dramatically, lending $32 million to small businesses last year and planning to lend $50 million this year.

"Credit unions by their nature are designed to serve the underserved," said Frank Amantia, president of Mid-Atlantic Financial. Banks, he said, "have not stepped up to the plate and filled that need" of local businesses seeking loans.

Credit unions, historically focused on consumer lending, increasingly are making loans to businesses, too. But the industry's potential role in fueling an economic recovery, and its opportunity to seize market share from struggling banks, is limited by federal limits on the share of a credit union's resources that can be devoted to business lending.

The industry now is mounting a vigorous campaign to lift the cap. Sympathetic legislators have introduced bills in the House and Senate that would more than double the business-lending capacity of credit unions. But banks vigorously oppose the idea, arguing that credit unions should remain focused on their traditional mission of making loans to consumers.

The Obama administration has made increased small-business lending a centerpiece of its economic agenda, and credit unions say raising the cap would instantly increase loan availability at no direct cost to taxpayers. But credit unions are barely mentioned in President Obama's proposals to increase small-business lending.

"We work very closely with credit unions and we have put forward a number of initiatives to help small businesses, but we are always willing to explore new ideas," Andrew Williams, a spokesman for the Treasury Department, said Monday.

Credit unions are tax-exempt, cooperative institutions that offer loans to members at low interest rates. Most of the nation's several thousand credit unions serve small communities, such as the employees of a particular company. In 1998, Congress passed a law making it easier for them to expand but requiring a focus on consumer lending, in particular by limiting business lending to 12.25 percent of assets.

That limit was largely hypothetical until regulators lifted a number of other limitations on business lending in 2003. Small-business lending by credit unions shot from under $10 billion at the end of 2003 to more than $35 billion as of the end of September, according to Bill Hampel, chief economist at the Credit Union National Association, a trade group. But CUNA warns that the growth is not likely to continue, as 180 credit unions already are bumping up against the federal cap.

Sen. Mark Udall (D-Colo.) introduced legislation in December that would lift the lending cap to 25 percent. A similar bill is pending in the House. An analysis by CUNA estimated that credit unions could make an additional $10 billion in business loans in the first year after the change took effect.

David Ely, a finance professor at San Diego State University who has studied the issue, said there was good reason to think credit unions had the capacity to increase small-business lending, though he cautioned that the impact on the economy would be modest. The banking industry holds more than $800 billion in small-business loans.

"The credit union industry is still quite small, so even if they moved in that direction it would be helpful, but it's not going to have a dramatic effect on the availability of credit to small businesses," Ely said.

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