Thrifts Seek Commercial Market

July 16, 2004
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WASHINGTON, D.C. — Commercial lending only accounts for roughly one percent of all loans made by credit unions in 2003.

According to the Credit Union National Association (CUNA), the average size of a credit union business loan made last year was only $120,851. That figure doesn’t carry much clout in the business world. It’s not enough to buy a large, modern press, let alone a steel mill. It’s a mortgage for a small house.

Data show that business lending by credit unions has been stagnant for a while, as last year’s loan level was similar to the one in 1995. While many want that statistic to improve, not having a bigger slice of the commercial-lending pie isn’t a major concern for every credit union official.

“It’s important to some credit unions, not all, by any means,” said Patrick Keefe, CUNA vice president of communications, from his office in the nation’s capital.

CUNA numbers show there are about 9,750 credit unions in the nation and those CUs made $387 billion worth of loans through November 2003. The 432 Michigan credit unions lent $17.8 billion last year. A vast majority of those, however, were consumer loans made to members for autos and homes. Taken together, borrowing for cars and houses was about 85 percent of all the money that CUs loaned last year.

But Keefe said quite a few credit unions consider commercial lending as an area of potential growth. He noted some were already working diligently to enlarge their business-loan portfolio, and the main target of their growth strategy is the small business owner who belongs to a credit union.

Why? Because CUs can only legally enter into a loan agreement with a member, meaning they can’t solicit nonmembers for loans. Keefe said a growing number of credit union officials have begun to let those members know that they have funds available for their businesses, a type of communication that CUs weren’t doing very much of a few years ago.

Most of the business loans made by credit unions are to members who have borrowed money for their cars and homes in the past and were pleased with the service they received from their CUs. It’s very rare to find a business owner who has joined a credit union just to get a commercial loan.

Keefe added that a large number of commercial-loan customers are members who have either been let go by their employers or retired recently, two groups that are looking for something else to do. Loans for new equipment and business start-ups are the ones made most often by CUs.

Credit unions are also under a loan cap, hampered by how much money they can lend.

“Under federal regulations, they can’t loan greater than a sum equal to 12.25 percent of their net worth, and that can be very limiting,” said Keefe.

“The average loan by credit unions is somewhere in the neighborhood of $100,000 to $125,000, which is peanuts when you look at what most commercial banks will be doing,” he said, while adding that $2 million is the most a CU can offer in a single loan to a business.

According to CUNA, again, banks own 90 percent of the business-loan market. Savings and loans have captured 9 percent, meaning credit unions can claim the remaining one percent. A 2002 survey conducted by the American Banking Association found that only 4 percent of commercial bankers saw credit unions as chief competitors for business loans.

All that loan data — along with another reason — explain why CUs are now paying closer attention to the Small Business Administration.

The other reason is that business loans made by CUs and backed by the SBA do not count against the 12.25 percent cap to which federal rules hold credit unions, because those notes are guaranteed by the government.

“SBA programs, as you might be aware of, are not the easiest in the world to deal with, and it’s a learning process that credit unions are going through now to get involved with these,” said Keefe.

“That is why we have had interest in the legislation that is going through Washington, and the SBA has a great interest in us, as well. They see credit unions as a way of expanding and realizing their own goals of making more small loans to small business.”

CUNA, which serves 90 percent of the nation’s credit unions, has lent its support to a pair of recent bills that involve the SBA.

HR4062, signed into law by President Bush in April, raised the maximum amount a CU can loan to a business to $2 million. The ceiling had been lowered for a time to $750,000 when it appeared the SBA would run out of funds. The bill added 30 percent, or $12.7 billion, to the SBA’s Guaranteed Loan Program.

Another bill, with different versions from the House and Senate, would slightly increase the loan limits in two smaller SBA programs and authorize three other programs.

“Our concern was that the programs would not have any funding at all, which, of course, would dry up a source for credit unions right away and would also cause them to hit that cap pretty quickly,” said Keefe.

For a while the SBA just allowed community credit unions to participate in its top loan program on the belief that only community-chartered CUs served the general public. But after CUNA held extensive talks with SBA, Keefe said the agency opened the guaranteed program to all credit unions.

Still, the upcoming fiscal year budget request has the SBA facing a 15 percent funding cut and requires the guaranteed program to become self-funding.

Credit union officials that want to learn more about commercial lending are likely to be in Madison, Wis., this week for a three-day program that CUNA is sponsoring on economics and business loans. Keefe said there are two main reasons why the program is being offered.

“This is a new area for them. A lot of credit unions are still asking the question, ‘Is this something we really want to do?’ We’ve focused, really, for the last 70 years, on consumer lending. So business, or commercial, lending — whatever you want to call it — is something new and a lot of people aren’t sure they want to get their feet wet in it,” he said.

“The second part is credit unions have a long history of cooperating with each other. So they will sit down in a room and share success stories with each other.”    

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