The recent failure of a small credit union in the San Fernando Valley barely caused a ripple in the world of finance. But it could become Exhibit A in the banking industry’s case against expanding the power of credit unions to make business loans.

Telesis Community Credit Union, a Chatsworth institution that became a prominent national commercial lender despite its small size, was shuttered by regulators March 23 because of heavy losses, particularly in its business loan portfolio.

The move came as the U.S. Senate is preparing to vote on legislation that would dramatically raise the ceiling on credit unions’ business lending. The higher limit, according to one projection, could generate hundreds of millions of dollars in small-business loans in Los Angeles County. The Senate is expected to vote as early as this month.

The banking industry, which has fought for years against the proposed change, has already seized on the failure of Telesis to lobby against what it calls unfair legislation that could lead to heavy loan losses.

“It would be obscene to advance expanded member business lending after the example we’ve had with Telesis,” said Paul Merski, chief economist for the Independent Community Bankers of America trade group in Washington, D.C. “You’re already seeing what could happen if member business lending is expanded.”

The organization has collected more than 12,000 signatures in an online petition opposing the effort to raise the cap.

The proposed legislation would allow credit unions to lend as much as 27.5 percent of their assets to small businesses, up from the current limit of 12.25 percent. Though most credit unions do little if any commercial lending, industry leaders argue that the existing cap limits the ability of some institutions to adequately serve their members, particularly at a time when many small-business owners are complaining about the difficulty of securing credit.

According to an analysis by the California Credit Union League, an industry trade group, raising the cap could generate $642 million in small-business loans in the county in the next year, creating as many as 7,000 jobs. Several of L.A.’s largest credit unions, including Kinecta Federal Credit Union in Manhattan Beach, have indicated that they want the opportunity to do more business lending.

“America’s small businesses continue to struggle to find the capital they need in order to start or expand their businesses,” said Bob Arnould, senior vice president of government affairs for the Ontario-based league. “Credit unions can play a critical role.”

Prev

For reprint and licensing requests for this article, CLICK HERE.