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Wednesday, Jun 29, 2022

Credit Unions May Get More Work

While U.S. Senators spar over a major jobs bill, local credit union leaders are keeping a close watch on a provision in the legislation that would dramatically expand their ability to lend to small businesses.

At the urging of the credit union industry, lawmakers have put forth an amendment that would more than double the cap on business lending for some credit unions to 27.5 percent of their assets – a move expected to be particularly significant in Los Angeles, which is home to many of the country’s largest credit unions. The Senate could vote as early as this week.

“It’s long overdue,” said Grace Mayo, chief executive of Chatsworth-based Telesis Community Credit Union, a commercial lending specialist with about $60 million in small business loans. “There are so many credit unions that have the capacity and should have the ability to make (business lending) a regular program.”

While many credit unions have not historically been commercial lenders, industry watchers believe raising the cap could lead to a sharp rise in small business lending in the local market.

According to an analysis provided to the Business Journal by the California Credit Union League, an increase in lending capacity could generate $694 million of additional small business loans in Los Angeles County over the next year – and the number could be even higher. That increase is about equal to the total loans made in Los Angeles in 2009 under the U.S. Small Business Administration program.

What’s more, the league estimates that the economic stimulation resulting from the new loans would create roughly 7,500 local jobs.

“California would be a major beneficiary of the legislation and Southern California in particular,” said Bob Arnould, senior vice president of government affairs for the league, an Ontario-based trade group with more than 300 credit union members across the state.

Already, some of L.A.’s largest credit unions, such as Kinecta Federal Credit Union in Manhattan Beach, have begun planning to increase their commercial lending in the event that the cap is raised.

Current federal regulations prevent credit unions from lending more than 12.25 percent of their total assets to small businesses – a level that some industry advocates argue is arbitrary and limits access to credit for many worthy companies.

Banking industry groups have vigorously opposed the higher cap, arguing that it could result in irresponsible lending and that it exacerbates the competitive advantage enjoyed by credit unions. Unlike banks, credit unions are tax exempt.

The possible change comes as part of a larger bill intended to increase jobs by stimulating small business through tax breaks and the establishment of a $30 billion loan fund for community banks.

A House version of the legislation, backed by President Obama, has already passed; as of press time, Senate Democrats were pushing to end a Republican filibuster and bring the bill to a vote. The Senate could pass the bill without approving the credit union amendment.

Credit union leaders, however, are keeping their fingers crossed.

“I think credit unions will be able to do so much more by lifting the cap,” Mayo said.

Small component

Credit unions can make business loans on their own, or through the SBA program, which backs most of the loan value in the event of default.

But credit unions, which are not-for-profit cooperatives owned by their members, generally do not make commercial loans, instead issuing home and auto loans, and credit cards. Some institutions avoid business lending because there is little demand from their members, while others shy away because of the costs associated with starting commercial loan divisions, including investment in personnel with sufficient expertise.

“It’s not for every credit union,” Mayo said.

Out of more than 140 credit unions headquartered in the county, just 53 originate small business loans, according to the California Credit Union League. Some of the area’s largest credit unions, including Wescom Credit Union and LBS Financial Credit Union, do not originate them.

Nationwide, business loans constitute just 4 percent of all outstanding loans made by credit unions, according to industry research firm Callahan & Associates Inc. But that may be changing.

“It’s not a big component today (but) it is one of the fastest growing components of the portfolio,” said Jay Johnson, Callahan’s executive vice president.

In the first quarter, business lending was up 9.5 percent year over year at credit unions nationwide. Meanwhile, bank lending has declined, leading to a severe shortfall in small business credit.

In a recent study that surveyed mostly small businesses, Pepperdine University researchers found that more than half of company owners said they cannot get the capital they need to grow. Nearly one-third said access to capital was the most pressing concern for their company.

Paul Cleary, vice president of business lending at Kinecta, L.A.’s largest credit union with $3.5 billion in assets, said he is getting calls regularly from area businesses looking for capital. The institution began offering business loans in 2006 but pulled back during the financial crisis.

Cleary, who said Kinecta is ready to offer small business loans again, said he has been “very focused” on the developments in Washington. A higher cap, he added, would allow Kinecta to dedicate more resources to such lending.

“We have our SBA license and would like to get back into that,” he said. “If they do raise that cap, it will certainly (help) us in our ability to make loans.”

Slow change

Local credit unions currently have $3.2 billion in outstanding commercial loans. The league estimates that an increase in the lending cap would generate nearly $700 million in additional small business loans in Los Angeles in the first year – more than a 21 percent rise.

Some are skeptical, though. Johnson said he does not expect an immediate flood of small business loans from credit unions.

“The vast majority of credit unions are still, at their core, very much consumer lenders,” he said. “I don’t think that’s going to change.”

Indeed, not every credit union would even qualify for the higher cap.

The new loan ceiling would only apply to well-capitalized institutions that have been offering small business loans for at least five years. Additionally, credit unions would have to receive approval from regulators.

Still, banks have fought efforts to increase the loan cap on credit unions.

Rod Brown, chief executive of the California Bankers Association trade group, released a statement recently decrying the “competitive inequities” that result from tax-exempt credit unions being allowed to offer many of the same loan types as banks.

“Bank-like credit unions compete openly with traditional banks for customers offering the same types of commercial bank products and services but they do so with a very strong competitive advantage over traditional banks,” he said.

The American Bankers Association went a step further, issuing a so-called Action Alert asking members to write to their senators and ask them to vote against the amendment that would raise the cap. A representative for the national lobbying group did not return calls requesting comment.

Arnould, of the California Credit Union League, said the banking groups’ arguments have no merit because the cap raise does not represent a change in credit unions’ products or mission.

“We’ve been making small business loans since our inception as credit unions a century ago,” he said.

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