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Credit union regulator moving to ease business lending rules

By TED CARTER

Lawyers for the credit union industry say the National Credit Union Administration’s proposal to loosen business lending rules for the industry amount to a deserved removal of its training wheels.

Bankers, to the surprise of no one, including the membership of the Mississippi Bankers Association, are not happy. They see the proposals as an encouragement for reckless lending and another gift to a tax-exempt financial services sector that should stick to a mission of accepting deposits from members and making consumer loans.

Bankers concede they don’t want credit unions taking a bigger bite of their commercial lending, but also argue credit unions lack expertise to increase their presence in the lending arena.

Expertise was once an issue but has become much less of one over the years as the non-profit institutions broadened their reach to include lending to members who have businesses or want to start one, said Charles Elliott, executive director of the Mississippi Credit Union Association, the advocacy arm of the state’s 83 credit unions. “We now have the expertise,” he said, citing the decade-and-a-half that credit unions have operated under business lending restraints set by Congress.

For the time being, credit union loan officers from across Mississippi are getting business-loan training from one of the state’s largest credit unions, Singing River Federal Credit Union, with 24,000 members and $193.4 million in assets.

Elliott said his members are only doing what bankers won’t do – make business loans that stay with the lending institution instead of getting sold in the secondary market.

“We make loans to people who can’t get loans from a bank or even a finance company,” Elliott said. “The easiest way for banks to eliminate the competition is to start making these loans.”

The average credit union business loan in Mississippi is $204,000, according to Elliott. “In general, these are not even loans that banks are interested in. There is a gap where there is no one to meet the needs of these small businesses,” he said.

The need to get services to those small businesses is behind the new proposals, say attorneys Guy A. Messick and Brian Lauer, credit union industry lawyers and columnists for the Credit Union Times. Lifting of various lending restrictions “will position credit unions as more valuable community business lending sources,” the Media, Pa.-based lawyers said in a jointly written column.

A key proposal from the National Credit Union Administration, the credit union industry’s supervisory version of the FDIC, would increase the cap on business lending to an as-yet-undermined percentage of assets. The current cap, mandated by Congress and in place since 1998, is 12.25 percent.

The National Credit Union Administration, or NCUA, also proposes giving credit union loan officers more latitude in assessing risks and deciding how to underwrite business loans.

Messick and Lauer, the credit union lawyers, explained the proposed flexibility this way: “As long as the credit union can articulate what they did was commercially reasonable to an examiner, and the examiner accepts the explanation, the credit union can make business loans on its terms. This is the difference between a prescriptive regulatory philosophy and a principal-based regulatory philosophy.”

For now, Elliott said he and his members are awaiting clarification from the NCUA on how different types of business and commercial loans will be applied to the cap. With fewer than 10 credit unions that make business loans, “all of this for us in Mississippi is not going to affect our credit unions significantly,” he said.

“If you look at our loan portfolio, less than 3 percent of that total loan portfolio is in business loans. It is probably less than 1.5 percent of total assets.”

Further diminishing the impact of the proposed rules is the cap exemption many of Mississippi’s credit unions have. The exemption – carried by Mississippi credit unions of all sizes – comes through a “low-income” service classification, Elliott said.

“They still are concerned” about the cap, though,” Elliott added of the state’s credit unions.

He said the 12-month delinquency rate for Mississippi credit unions through the end of March stood at 1.5 percent with charge-offs of 0.65 percent. “Compare those to the banks,” Elliott said.

Mississippi’s FDIC-insured lending institutions at the close of the first quarter had non-performing assets of 1.15 percent; net charge offs from loans and leases were 0.11 percent, according to the FDIC.

The gripes bankers are bringing to Washington regarding credit unions go beyond opposition to the cap increase. They see the NCUA’s proposal to loosen rules on business lending to non-members as an encroachment on their business.

Considering the limited financial punch credit unions bring to the business-lending arena, it’s not so clear that such concern is merited, says Vincent Hui, a director for Phoenix-based Cornerstone Advisors and consultant to banks and credit unions on risk issues.

“Say I am able to make a large business loan and am not comfortable keeping such a large loan on my balance sheet. I’ll offer portions of it to other credit unions.”

Conversely, a credit union with a low loan-to-share ratio may want to add some high-yield loans to its balance sheets. So it will seek out business-loan pools with other credit unions, Hui said, acknowledging “some risk” is there.

He said he also understands why community bankers don’t want the caps raised. “They are worried,” he added.

But “even if you raise the cap, how much more can they really do?” Hui asked of credit unions.

Though as a risk consultant Hui works both corners in this fight, he thinks more business lending is a critical pursuit for credit unions in filling their role as a community resource.

“Small-business lending is kind of an extension of what credit unions were created to do,” he said in an interview last week from Seattle.

“The underwriting for small business is closer to consumer underwriting” than large-scale commercial lending, Hui added.

“If I lived in Mississippi, I would say ‘What is going to be better for Mississippi’? Some credit unions will be able to lend to small businesses that banks will not want to.”

The National Register posting sets an Aug. 31 deadline for comments on the rule changes. The National Credit Union Administration says the final rules adopted would be implemented over a 180-day period.

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