Credit unions seek larger share of business loans

By Binyamin Appelbaum
Washington Post Staff Writer
Tuesday, February 9, 2010; A11

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.

There are regulatory concerns. A 2003 report from the Government Accountability Office warned that the National Credit Union Administration, the federal agency that oversees credit unions, might struggle to regulate business lending by credit unions because the relatively small volume of such lending would make it difficult for its examiners to develop expertise.

Banks also say the change would create unfair competition because credit unions can use their tax-exempt status to offer loans at lower interest rates. A 2003 study found that the tax advantage allowed credit unions in Virginia to charge interest rates on consumer loans more than half a percentage point lower than banks. Small business lending is a predominant activity for many community banks, and the industry argues that there is no reason for the government effectively to subsidize business lending by credit unions.

"It's not needed, and history has shown that they are not just limited to the classic small business. They make these loans for huge condo projects, for hotels, for strip malls," said Ed Yingling, president of the American Bankers Association. "Should those kinds of institutions be getting taxpayer-subsidized loans?"

Credit unions counter that most of their loans are to small businesses neglected by banks, particularly the smallest companies and particularly during the current lending drought. Bank lending has contracted over the last two years, and the share of small businesses that say they cannot get the loans they need has increased.

Mid-Atlantic Federal Credit Union hired Amantia to build a small-lending business in 2003. The credit union was founded to serve IBM employees, but it had long since broadened its mission to serve residents of Montgomery County. Amantia created a subsidiary, Mid-Atlantic Financial, that made loans with money provided by the credit union and sometimes with money provided by investors.

Steven Smits, a local banker with long experience in lending to small businesses, joined last year to help grow the operation. He said that as banks pulled back on small-business lending, he was attracted by a rare opportunity to keep making loans.

"There is an untapped resource, and it's credit unions," Smits said.

Last year Mid-Atlantic made loans to 30 companies. And the whiteboard for 2010 already shows more than a dozen names.

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