NCUA chief: Limit lift would help credit-union lending

Debbie Matz, chairwoman of the National Credit Union Administration, which oversees federal credit unions, spoke to the U.S. Senate committee on banking, housing and urban affairs on June 16. Here is an excerpt from her comments.

Many businesses, especially small businesses, count on credit to finance their operations, such as inventories, and to meet weekly payrolls. Disruptions in the availability of credit have been associated with particularly painful downturns.

Our most recent contraction, dubbed by some as the Great Recession, is no exception. In the last six months of 2008, more than 70 percent of banks were tightening standards on commercial and industrial loans to borrowers of all sizes, and more than 80 percent were tightening standards on commercial real estate loans.

Credit contracted sharply. Bank loans to non-farm, non-corporate businesses - outside of mortgages - fell almost 20 percent from the end of 2008 to the end of 2009.

The economic consequences of the credit contraction that began in the fall of 2008 were immediate and severe. Businesses liquidated inventories, consumer demand disappeared and worker layoffs surged.

While conditions in financial markets have improved, access to credit remains difficult for many small businesses and entrepreneurs that depend on financial institutions for such funding. According to the FDIC Statistics on Depository Institutions, net loans and leases by all FDIC-insured institutions fell by nearly 9 percent between year-end 2008 and the first quarter of 2011, including a decline of 1.6 percent so far in 2011.

Between the first quarter of 2010 and the first quarter of 2011, total small-business loans (loans less than $1 million) secured by non-farm, non-residential properties fell by

7 percent, and loans less than $100,000 fell by 14 percent.

Small-business commercial and industrial loans fell by 10.3 percent over the same period.

Though making up only approximately 1 percent of total commercial loans in the United States, credit unions serve an important role in lending to small businesses and continued to extend credit during the economic downturn. Today credit unions have more than 167,000 outstanding loans to businesses.

The dollar-weighted average credit union member business loan (MBL) is $223,000, indicating credit unions are predominantly serving the needs of small businesses. The two most common types of loans - non-farm residential property loans and commercial and industrial loans - average $160,000 and $127,000, respectively.

Over the period from year-end 2007 through the first quarter of 2011, credit union lending increased by nearly 6 percent. Total member business loans, in particular, increased by 41.4 percent during this time frame.

Member business loans with portions guaranteed by the Small Business Administration grew by 81 percent.

Credit unions have a long history of meeting the business lending needs of their members, dating back to the inception of our nation's credit union movement in 1908. In fact, the first credit union ever chartered in the United States, St. Mary's Bank Credit Union, had as a primary lending focus to “establish neighborhood business.”

Over the last century, credit union business lending has evolved from providing mostly agricultural and farming loans to funding small business start-ups as well as contemporary commercial real estate projects ....

As credit unions continue to offer MBL services to their members, more credit unions will approach the statutory limit, thus limiting the avenues of credit available to small businesses.

Legislation proposed by Sen. Mark Udall would allow well-capitalized and well-managed credit unions with a proven track record of member business lending to grow their MBL portfolios - in small, manageable increments - to as much 27.5 percent of total assets.

This statutory change would allow credit unions with well managed MBL programs to provide additional funding to meet the financial needs of their members and their communities, thereby contributing to the economic recovery and job growth.

Further, the provisions of S. 509 requiring a tiered implementation of a higher cap are appropriate safeguards to ensure this authority is exercised only after credit unions offering MBLs have demonstrated proper controls.

The potential to reach a higher cap could lead more credit unions to make the economic decision to invest in the infrastructure, develop the policies and hire the expertise needed to engage in an effective, prudent member business lending program. NCUA projects that credit unions could extend several billion more dollars in MBLs in the first few years after passage and implementation of S. 509.

If each credit union most likely to qualify immediately for higher MBL limits under the bill increased member business lending by 30 percent, more than $2 billion in credit would be extended.

In addition, some credit unions that are not presently near the cap, including some that do not make MBLs, are likely to increase their MBL activity because they could achieve appropriate economies over the long term with the higher cap.