Credit Unions Seek to Lift Small Biz Lending Cap

Even as bank lending to small businesses decreased in the last three years, lending by credit unions increased. Now, credit unions want congress to loosen the limits on how much the nonprofit financial institutions can lend to businesses.

A bill introduced by Sen. Mark Udall (D-Colo.) on March 8 would let credit unions increase their small business lending, now capped at 12 percent of assets, to 27 percent.

Credit unions had about $39 billion in outstanding loans to small businesses last year, up from $24 billion in 2006, says Bill Hampel, chief economist at the trade group Credit Union National Association, citing data credit unions report to regulators. The equivalent lending by commercial banks peaked in 2008 at nearly $700 billion and declined to $626 billion in 2010, according to bank regulatory filings. (Both measure loans under $1 million, which the government uses as a proxy for lending to small businesses.)

About two-thirds of the nation's 7,000 credit unions don't do any business lending at all, Hampel says. Of those that do, about 350 are near the cap, meaning business loans constitute between 7.5 percent and 12.5 percent of their assets, he says. Even at 7.5 percent, a credit union will start "tapping the brakes" on business lending and might reach the cap in three years, he says.

Banks oppose lifting the limit, saying that business lending takes tax-exempt credit unions away from their nonprofit mission of serving members. "Credit unions were granted tax-free status to help them serve individuals of modest means, not to get into business and commercial lending," Camden Fine, head of the Independent Community Bankers of America trade group, wrote in a March 3 letter to congressional leaders.

Hampel says lending goes to businesses owned by credit union members, and the average loan size is about $200,000. The 12 percent limit was created in 1998, and it doesn't apply to about 100 credit unions that were major business lenders before then and were grandfathered in. In addition, loans under $50,000 and loans guaranteed by the Small Business Administration don't count toward the cap. Attempts to pass a version of the bill last year in the Small Business Jobs Act failed.