No Deal For Credit Unions On Small Business Lending

Jan 2, 2013

One group that didn’t get the Christmas present they were hoping for this year is the nation’s credit unions. They want to expand their lending to small businesses, but as Harriet Jones reports, regulation – and opposition from the banks -- stands in their way.

Many credit unions have a history of humble beginnings, and the Charter Oak credit union, based in Groton, is no exception.

“We were born in the Electric Boat boatyard, out of a lunchbox where five people put in $25.” 

That’s Brian Orenstein, CEO of Charter Oak. The institution he presides over is now the state’s third largest credit union with $750 million in assets. The overwhelming majority of that cash is from individual investors looking after their domestic finances, but in recent years, Charter Oak has gone after business lending in an aggressive fashion.

“We have loans to little leagues, we have loans to the local grocery store. We have a loan to the Mystic Shipyard, we have loans on mobile home park. In the beginning we saw a lot of smaller loans, like a plumbing truck or something like that, but we also are able to see some larger real estate deals as well.” 

Charter Oak has been hiring business lending professionals and adding up to $10 million in commercial loans to its portfolio in the last three or four years. But that expansion has a very definite end in sight. By federal law, no credit union is allowed to have more than 12.25 percent of its assets in commercial loans. At the moment, Charter Oak has 30 million dollars worth of business loans. They’ll hit the cap when they’re at $90 million.

“So if you extrapolate that out, we only have about three or four more years of business lending to do. So when you look at a strategic plan, it’s hard to build resources like people, experienced lenders who look at quality and also have the relationships. After five years, we would almost have to stop doing that business, and what do you say to your business lending people, what do you say in your strategic planning?”

Other credit unions have already bumped up against the ceiling, and when local businesses come calling looking for financing, they have to be turned away, or referred to another institution. The fix the credit unions have long been after is a piece of legislation raising the lending cap to just over 27 percent of assets. Tony Emerson is director of the Credit Union League of Connecticut.

“This would create hundreds of thousands of jobs and put $10 billion plus back into the economy, and we think that’s a good idea.”

What’s standing in their way is the banking lobby. All through this year, credit unions have remained locked in a longstanding and occasionally bizarre struggle with the banks over the legislation.

“We don’t fight with banks here. We’ve got some good community banks here and we’ve got some great credit unions here and we work well as a financial industry in Connecticut. But the national lobby for the banks is dead set against it.”

In recent months the national banking lobby has tried to create a quid pro quo with a piece of legislation that they’re seeking that would renew federal guarantees on their own business lending accounts. So far, both bills have failed to pass. Emerson says banks are afraid of losing business to the credit unions, but he says that fear is misplaced. According to him, credit unions are not after multi million dollar commercial real estate deals -- He tells the story of an electrician in New Haven seeking a $100,000 loan for a new van and some tools. He went to eleven different banks and was turned away by all of them, before finally getting the financing from his local credit union.

“I don’t know why in all eleven situation that loan was turned down, but one must speculate that that’s just not a loan that those banks wanted to make.”

At Charter Oak in Groton, Brian Orenstein says for him, allowing credit unions to expand their business lending is simply a matter of consumer choice.

“The business should have as many options as possible to go out and get their loan. In a free competitive situation, the more banks or credit unions you have in that equation it’s going to be the better off for the member – he’s going to get a lower interest rate, he’s going to get more favorable terms.”

Banks for their part say this isn’t a level playing field. While credit unions are a comparatively small part of the financial services landscape, they do enjoy tax-exempt status. They say from those humble beginnings in the nation’s lunchboxes, credit unions have now grown into a powerful force that still enjoys special treatment from congress – and they’re not keen to take them on in a fight over business lending.

For WNPR, I'm Harriet Jones.