Credit unions pushing for lending cap lift

For small businesses, finding a credit union that is willing and able to lend may be getting easier. Image: Flickr / rmgimages / CC-BY-SA

Two new bills presented in both the House and Senate would help credit unions lend more to small businesses. Current law limits credit unions to lending less than one-quarter the total amount banks loan.

Lack of small loans

For small businesses, getting the money that they need to start, expand or run their businesses can be very difficult. Banks do not make many small business loans, especially to small businesses that do not have a long business history or a strong credit report. Loans such as this less than $250,000, make up about 8 percent of bank portfolios, but 44 percent of credit union portfolios. The business loans that banks do make tend to be larger, more than $250,000.

Capping member loans

Current legislation caps the total loan that credit unions can offer to members. The legal cap limits business loans to 12.5% of the credit union assets. The two bills in consideration by Congress would lift this limit, essentially allowing credit unions to leverage more of their total assets in business loans. For many small credit unions with $100 million in assets, it would take less than 10 big business loans to bring them close to the cap. The limit, however, does not apply to loans less than $50,000 in total value.

Making use of federal help

The 2010 Small Business Jobs Act and the 2009 American Recovery and Reinvestment Act both contained enhancements that allowed the Small Business Administration to guarantee more loans. These guarantees, however, did not do as much as was desired to support small businesses. The bill allowed for $30 billion in small business loan guarantees, but only $4.8 billion has been actually used for loan guarantees, partially due to this credit union lending limit.

[These loans essentially act as a cash advance for business owners.]

Effects of lifting the limit

Advocates for credit unions claim that lifting the payday lending cap would create several hundred jobs created by small businesses and new start ups. The bill would also have no direct costs to taxpayers. Opponents of the bill, however, claim that lifting the lending cap would give credit unions, which are nonprofit institutions, an unfair advantage in competing with banks. Opponents also warn that the lending cap prevents credit unions from overextending. If a credit union is overextended, then loan defaults could put a credit union’s status as a safe financial institution at risk. Opponents also argue that the cap would actually affect less than 1 percent of the credit available to small businesses, as it would mostly affect credit unions that are already bumping up against their lending caps.