Connecticut banks and credit unions are deeply divided over a congressional proposal that would allow credit unions to double the amount of commercial loan business they can legally underwrite.
The bill before Congress would increase credit unions’ ability to lend to businesses to 25 percent of a credit union’s total assets, up from 12.25 percent. It would also increase the size of loans exempt from the cap to $250,000 from $50,000.
The proposal has been raised in the past, but it’s gaining support on the heels of the financial crisis, which created a severe credit crunch for many small businesses.
Local credit union officials say the bill’s passage would help infuse billions of dollars into the economy, creating jobs and growth opportunities for companies in Connecticut and around the country.
“It’s almost a no brainer,” said Tony Emerson, president and CEO of the Credit Union League of Connecticut. “Credit is still frozen to some extent. We hear horror stories about doctors and businesses not being able to secure lending. This would allow credit unions to expand more of their commercial lending and stimulate the economy.”
But bankers stand against the measure, arguing that any increase in credit union business lending would undercut community banks, whose bread and butter is making commercial loans.
Gerald Noonan, president and CEO of the Connecticut Bankers Association, said credit unions were created by Congress, and given certain tax exemptions and regulatory advantages in order to serve middle- and moderate-income individuals, primarily through consumer lending. Allowing the member-owned institutions to expand their commercial footprint, will distance them from that mission, Noonan said.
“This is another attempt at a power grab,” Noonan said. “If they want to be like banks, then they should become a bank.”
According to the Credit Union National Association, credit unions held $36 billion in business loans as of September 2009, and about 350 credit unions will likely reach the 12.25 percent lending cap in the next three years.
In Connecticut, fewer than five credit unions do significant commercial lending. Emerson said if the bill passes, credit unions around the country could lend an additional $10 billion to small businesses in the first year, helping create as many as 108,000 new jobs.
East Hartford-based American Eagle Federal Credit Union got involved in commercial lending about two years ago and has about $43 million in business loans on its books, equal to about 3.2 percent of its total assets.
Dean Marchessault, executive vice president and chief operations officer at American Eagle, said he projects the credit union will be at the 12.25 percent lending cap in two to three years.
American Eagle got involved in commercial lending to diversify its portfolio and help serve local market needs, he said.
“Over the long haul it’s very important to us that they increase the cap,” Marchessault said. “It’s important for the entire industry. There are a lot of credit unions that are already at the cap.”
Ed Danek, president and CEO of Hartford Federal Credit Union, said permitting credit unions to increase business lending will help meet the capital needs of small businesses, particularly during economic downturns, when it is most needed.
He said not enough banks, especially the larger ones, are involved in small business lending and others were reluctant to grant credit to smaller businesses when the economy headed south.
“That was devastating to the economy, since the majority of new jobs are created by small business and some could not expand or even maintain their current level of operations without additional credit,” Danek said.
Total loans and leases held by Connecticut’s 55 federally insured banks fell about 3 percent in 2009 to $51.1 billion, according to data from the Federal Deposit Insurance Corp. At the same time Connecticut’s 141 federally insured credit unions saw a 2 percent uptick in loans totaling $4.5 billion.
But Noonan said while access to business loans may be a problem in other parts of the country, it’s not as bad in Connecticut. He said business loans were down last year mainly because borrowers were less creditworthy.
“There is plenty of money out there to lend to creditworthy businesses,” Noonan said.
In terms of credit unions encroaching on banks turf, Marchessault said that concern is overblown. He said credit unions will never threaten the lending capacity of banks, because most of them are much smaller in size.
“Commercial lending has been there space for a very long time, so I understand they don’t want any new players,” Marchessault said. “But there is plenty of room out there and our members deserve to have an alternative choice.”
