Business lending booming at credit unions
But banks are fighting in Congress to stop the expanded limits of CU loans.
The Michigan Credit Union League says Grand Rapids credit unions increased outstanding business loan balances by slightly more than 50 percent over a 12-month period, based on 2015 first-quarter data analyzed by the Credit Union National Association.
First mortgages and new and used car loans also grew significantly at 36.5 percent, 23.9 percent and 16.9 percent, respectively, states a press release from Laura Michels of MCUL.
Meanwhile, in Washington the Independent Community Bankers of America is fighting a proposed increased in the amount a credit union can loan to its members for their businesses.
Currently, a credit union commercial loan portfolio can be no more than 12.25 percent of its total assets value; the proposed change by the National Credit Union Administration, an independent federal agency, would double that.
The ICBA says the NCUA proposal “would encourage reckless lending, endangering the credit union system and the National Credit Union Share Insurance Fund.”
MCUL said credit union member business lending throughout Michigan increased 16.3 percent, outpacing the 11.5 percent national average increase. The organization also said that, every year since the economic downturn in 2007, the Michigan credit union industry has exceeded national business lending growth “by wide margins.”
“Michigan credit unions understand the importance of lending to small businesses as a way to stimulate the economy and spur business growth,” MCUL President/CEO Dave Adams said.
“The industry stepped up to fill a need during the recession in the same way it shows its steadfast support for its 4.79 million credit union members.”
MCUL says Michigan credit unions granted $3.5 billion in total loans during the first quarter of 2015 — the highest first-quarter loan total on record. In addition, the 11.5 percent total loan growth increase over the 12-month period is the fastest annual increase since 1993, according to CUNA data.
Throughout Michigan, credit union loan growth has been:
- Used automobiles: 15.6 percent
- New automobiles: 16.5 percent
- Member business loans: 16.3 percent
- Other unsecured loans: 11.6 percent
- First mortgages: 8.8 percent
- Credit cards: 5.7 percent
“We’re seeing it increase. We’ve got a lot of demand out there,” said Brent Lowell, vice president of commercial and consumer lending at Option 1 Credit Union.
Option 1 had assets of $285 million at the end of June and has branches in the Grand Rapids and Lansing areas.
In the recent past, he said, there were some refinance prospects Option 1 was interested in, but the property values were too low in relation to what was still owed — familiar fallout from the Great Recession.
“So a lot of people were stuck at bank rates of 8 or 9 percent on real estate,” but now values are back up on residential property, Lowell said, “and we’re seeing it go up on the commercial side, as well.”
Now those companies can get that refinancing and increase their cash flow.
“We’ve seen an increase in demand for working capital lines,” as companies’ revenues are increasing, noted Lowell, and they wait out that gap before receivables come in. Other business loans Option 1 makes to its members are often for equipment.
But it was that inability to refinance real estate after the values tanked that was stalling progress for many businesses.
“The people who were treated poorly by the banks during the recession are finally able to refinance their real estate … and lock in some good fixed rates while rates are low,” he added.
On the other end of the spectrum is Lake Michigan Credit Union, based in Grand Rapids and now the second-largest commercial lender among credit unions active in Michigan. The largest is United Federal Credit Union, headquartered in St. Joseph since 1949, with locations in Michigan, Ohio, Indiana, North Carolina, Arkansas and Nevada.
As of June 30, LMCU had total assets of $3.8 billion, which under federal law would allow it to carry up to $465 million in commercial loans. As of June 30, it had a total commercial loan portfolio of approximately $226 million, an increase of 65 percent compared to June 30, 2014.
Jim Maskell, senior vice president of commercial lending at LMCU, said most of its commercial lending is for real estate, and the real estate loan portfolio grew by 37 percent during 2014, while all of its commercial lending grew by 47 percent.
“We have actually grown (the LMCU loan portfolio) by 85 percent” since the start of 2014, said Maskell.
LMCU is seeing a lot of manufacturing-related lending, he said, ranging from real estate investments to operating capital. Within manufacturing, much has been in food industry, while health care and education also are borrowing.
“We are really now elevated to the point where we can take over an entire (credit) relationship, regardless of what the actual lending need might be,” he said.
One client has borrowed $25 million, but that is “nowhere near what our individual lending limit” is as determined by NCUA rule.
Business lending by credit unions is “definitely a growing competitor to the banks,” said Maskell.
However, it should be noted credit unions still only have about 6 percent of the deposit market share in the U.S. — far less than that of banks.
But credit unions are growing. In Michigan, first quarter 2015 membership rolls increased by 1.8 percent over the previous quarter, for a total of 4.79 million credit union members. MCUL said there has been an increase of 350,000 members since March 2010.
On July 21, the ICBA, which represents more than 6,000 community banks, asked the Senate banking committee to convene a hearing on the July 1 NCUA proposal to loosen the 12.25 percent cap on business lending set by the 1998 legislation.
The ICBA said “one very egregious aspect of the proposal would change the calculation of the (member business lending) cap so that it is significantly higher, in defiance of the plain language of the statute. … The proposal would also facilitate expanded commercial lending outside of the MBL cap. As members of Congress know, the MBL cap has been contentiously debated in Congress. The NCUA should not be allowed to end run Congress by making a change of this significance by regulatory fiat.”
ICBA contends the proposal would discard or weaken a series of restrictions on member business lending, “such as borrower guarantee requirements, loan-to-value caps on collateral used to secure loans, and loan-to-a-single-borrower limits. These provisions are critical to prudent credit union business lending.
“Reckless business lending has already jeopardized the credit union system. Credit unions lack the experience and the expertise to safely conduct business lending, and the NCUA lacks experience in supervising business lending.”
ICBA said NCUA has conceded “poorly managed business lending activities were a contributing factor in the failure of at least five credit unions since 2010. They account for roughly $141 million, or 25 percent of total share insurance fund losses over the last five years.”
NCUA, according to ICBA, also has stated credit union member business loans “are delinquent 2.5 times the rate of all loans, and imprudent business lending has led to the weakening or failure of hundreds of credit unions.”
“Credit unions were created to serve people of modest means with a common bond among them,” and that is the reason credit unions are tax exempt, said ICBA.
“Business lending does not serve the original credit union mission,” said ICBA in its letter to the Senate banking committee.