When Listerhill Credit Union, Sheffield, Ala., entered into member business lending eight years ago, it was more by chance than design.
A local church needed funding for a construction project and approached the credit union for financing. Word spread among Sheffield’s close-knit business community and credit requests from other churches and small businesses soon followed.
“It was all word-of-mouth,” recalls Brad Green, CEO of the $541 million asset credit union. “We didn’t advertise or market our business services; we simply responded to the demand. And we weren’t financing large developments. Most of our loans were very small—$200,000 or less.”
Over the next six years, just by responding to requests from local businesses, Listerhill built up a $50 million business loan portfolio—enough to put it perilously close to the federal cap limiting credit union member business loans (MBL) to 12.25% of assets.
“We had to pull back,” Green says. That meant restricting much-needed funds for loyal, creditworthy business members whom banks wouldn’t serve—due solely to an arbitrary cap on MBLs.
Listerhill isn’t alone in its dilemma: 511 credit unions will reach the 12.25% cap within three years, CUNA estimates. As of year-end 2011:
► 137 credit unions had business loan portfolios exceeding 10% of total assets, effectively stalling their business lending—they’re either at the 12.25% cap or will be within a year;
► 167 credit unions held business loans accounting for 7.5% to 10% of assets and will reach the cap within 2.5 years; and
► 207 are entering the “zone of concern” with 5% to 7.5% of assets in business loans. They’ll be capped within 2.7 years based on current growth rates.
Together, these credit unions account for 74% of all business loans subject to the 12.25% cap and 63% of total business loan growth among nongrandfathered credit unions. Without an increase in the cap, these successful lenders will see their portfolios stagnate, and small businesses will face more difficulty obtaining financing.
But credit unions, leagues, CUNA—and small-business owners—are making every effort to boost credit unions’ business lending authority. Passing the Credit Union Small Business Jobs Act (S.2231), which would increase the credit union MBL cap to 27.5% of assets under certain conditions, would inject the economy with $13 billion in small-business financing within a year of enactment and would help small businesses create 140,000 new jobs, CUNA estimates.
► The banking industry wants to define who CUs are and what they can and can’t do.
► Board focus: All CUs would benefit from an expanded business loan cap, even if they don’t offer business loans.
The effort is reminiscent of the credit union movement’s successful grassroots passage of H.R. 1151—the Credit Union Membership Access Act, which allowed credit unions to expand their fields of membership.
From the first-ever small business/credit union Hike the Hill event in February, to the Governmental Affairs Conference in March, to redoubled advocacy during the April Congressional District Work Period, CUNA has tracked more than 60,000 contacts with Congress in support of S.2231.
There will be no letup until the bill passes, says CUNA President/CEO Bill Cheney. “Senate leadership remains committed to a floor vote on this bill. Senators recognize our bill would create hundreds of thousands of jobs and inject billions of dollars into the economy—at no cost to taxpayers.
“The bill remains on the Senate calendar, and we know that small businesses will continue to join us in the push for approval,” Cheney continues. “After all, small businesses continue to need help finding credit—and more jobs certainly are needed in this economy.”
Community banks’ commercial loans declined 2% during 2011 while credit union business loans grew 5.1% over the same period, according to the Federal Deposit Insurance Corp. and NCUA.
While part of the decline in bank business lending is due to the slow economy, research indicates banks are turning businesses away. The Pepperdine Capital Markets Projects survey of U.S. small businesses indicates that banks denied 57% of business owners seeking financing during the preceding 12-month period.
A big reason for this, Green says, is that many banks no longer make credit decisions locally. They do so from some far-away corporate headquarters relying solely on an inflexible statistical model.
At Listerhill, a business loan committee comprised of four credit union executives makes the decisions.
“It’s a committee that’s made of up local individuals who, in many cases, know the people applying for the loans,” Green says. “We know their strengths, their stability, and, most important, we know their character. That’s the credit union difference. That’s the primary reason we make a lot of loans the banks won’t.”
The credit union approach appears to work: Listerhill has charged off only one business loan in its history, and has had virtually no delinquency.
NEXT: Why should CUs care?
Bill Merrick is deputy editor of Credit Union Magazine. Follow him on Twitter via @CUMagazine.