Small business lending

Small Business Owners Hike the Hill

Business leaders join forces with CUs to raise the member business loan cap.

July 9, 2012

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.

► CUNA has tracked more than 60,000 contacts with Congress in support of the CU Small Business Jobs Act.

► 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?


Why should CUs care?

Although credit unions offering MBLs are in the minority (31%), raising the cap is an issue all credit unions should care about, Green says. For one, more credit unions would offer business services if the cap increased.

“At the current cap, it’s difficult to fund comprehensive business services from that small of a loan portfolio—the necessary infrastructure and expertise are too expensive,” Green explains. “There are credit unions close to us that won’t even do business loans because the cap doesn’t allow enough volume to support the infrastructure.”

Business lending’s prohibitive start-up costs and stringent requirements, including the need to hire and retain staff with business lending experience, make it difficult for financial institutions with less than $45 million in assets—two-thirds of all credit unions—to enter this arena.

A $45 million asset credit union would be limited to $5.6 million in MBLs, CUNA reports. That’s roughly 25 loans, using industry averages. A portfolio of this size would generate roughly $170,000 in income—but $180,000 in expenses (this includes $88,000 for the salary and benefits of an experienced lender, $56,000 in other operating expenses, and $28,000 in loan losses).

Raising the cap to 27.5% of assets would allow credit unions as small as $20 million in assets to participate in business lending, giving the market access to more than 700 additional credit union lenders, CUNA estimates.

Plus, “history reminds us it’s wise” not to restrict credit unions’ powers, says John Radebaugh, president/CEO of the North Carolina Credit Union League, citing two ground-breaking initiatives, “save our share drafts” and the passage of H.R. 1151. In both cases, some credit unions had no plans to offer share drafts or to move beyond a single-sponsor charter.

“Some of these credit unions not only did not engage on these issues, a few actively opposed the credit union grassroots response,” he says. “How do those decisions look in retrospect? And perhaps more to the point, how many credit unions today are single-sponsor and don’t offer share drafts?”

But beyond the need for loans or expanded authority, the credit union movement must be able to maintain the political clout to define and defend itself, Green adds.

“The banking industry wants to define who we are and what we can and can’t do,” he says. “Whether credit unions participate in business lending or don’t, we should always be able to control our own destiny and not be at the mercy of someone else’s opinions or influence. We need to protect our ability to legislate an expansion of power when we need to. It’s time to unite around this common cause and be heard in D.C.”

Banks muddy the waters

The banking trade groups aren’t making this easy. They’re spreading so much disinformation that during visits with legislators “you spend half your time dispelling false statements the bankers make about credit union business lending,” says Patrick La Pine, president/CEO of the League of Southeastern Credit Unions.

He says banks have taken a page out of the credit union playbook by upping their grassroots efforts. “Before H.R. 1151, most bankers just wrote a check and didn’t do grassroots advocacy. They’re still writing checks but now they’re much more actively engaged with legislators.”

La Pine cites two other sticking points:

1. Politics often trumps policy. He says S.2231 is good public policy and a solid piece of legislation backed by stringent regulatory safeguards and credit unions’ history of making business loans since the early 1900s. But banks are “muddying the water” and trying to change the conversation with legislators.

La Pine believes this tactic is part of a larger, coordinated, anti-credit union strategy.

“We’ve seen this approach even on the state level with public deposits. They’re saying credit unions have an unfair advantage, and that if we want to go outside our little box we’ll have to be prepared to give up our tax exemption. Of course, they don’t talk about Subchapter S,” which exempts nearly one-third of all banks from paying taxes.

The bankers’ approach can be appealing to some legislators during times of high budget deficits and fiscal constraints, La Pine says. “We have to re-educate our state and federal legislators—and their staffs—that our tax status has no bearing on the products and services we offer.”

2. Some legislators believe they have to choose between credit unions and community banks.

“They’re sitting on the fence—and they’ll ride it as long as they can. They all hate the big banks, but they love credit unions and community banks, and they don’t want to choose between the two.”

That’s why it’s important to tell legislators that credit unions’ business loan market share is only 5.7%, CUNA reports. If credit unions doubled their market share in the future, banks would still own 88% of the market.

“I’d like to see an up/down vote so we know where our legislators stand,” La Pine says. “If they vote against us on member business loans, they could vote against us on our tax exemption. We need to know who are friends are—and who’s there just when it’s convenient for them. We should hold those people accountable at election time.”

Ironically, 60% of bankers responding to an American Banker poll said credit unions should be permitted to expand small-business lending. Another 10% agreed as long as those credit unions had sufficient capital.

NEXT: Keep up the fight

Keep up the fight

Enlisting small-business members in the effort to pass S.2231 has been an effective way to counter banks’ rhetoric, La Pine says.

The League of Southeastern Credit Unions, for example, asks its member credit unions to encourage small-business owners to send letters to legislators on company letterhead explaining how credit union financing made a difference in their lives and in the health of their businesses.

Video has been a powerful medium in telling business owners’ stories, he adds. “It drives the message home in a nice package.”

Listerhill created a website,, that includes several videos highlighting how the credit union helped local businesses when banks wouldn’t.

At press time, Senate leadership pledged to hold a floor vote on the MBL legislation, but a voting date had not been determined. CUNA encourages credit unions to build upon legislators’ support by continuing to contact and visit with lawmakers, and urge them to vote in favor of the MBL legislation.

Green is puzzled why there’s any hesitation to do so.

“It’s such a clear-cut issue to take legislation to simply allow an industry to free up $13 billion to lend. It’s hard to understand why we wouldn’t want to inject that kind of money into our economy at no cost to the taxpayer—and why there’s any hesitation to vote for something that seems so right in principle.”

1. E-Scan Strategic Planning Package
2. Member Business Lending initiative
3. The Small Business Authority, a CUNA Strategic Services alliance provider