Lending Cap Constrains Credit Unions
The 112th Congress, like its immediate predecessor, dealt a disappointing blow to credit unions late last year when it again declined to allow them to lend more money to businesses.
Until credit unions can gather enough political support to lift their member business lending cap, each remains subject to limiting business lending to 12.2 percent of total assets.
For a small group of credit unions across the U.S. — and a handful in Central Massachusetts — the cap means commercial lending will be constrained to a portion of asset growth for the foreseeable future.
Business lending remains an important revenue source and way to sign up new members, but most credit unions find themselves doing far more lending in areas that have no regulatory caps, such as auto loans, rather than providing credit lines and loans to small businesses.
Area credit unions hovering around the cap include Marlborough-based Digital Federal Credit Union (DCU), Worcester-based Webster First Federal Credit Union and Millbury Federal Credit Union.
Short of convincing Congress, there's only one way to increase the lending cap: grow assets.
That's what DCU has done. Through the third quarter of 2012, its total assets were up 20 percent over the same period in 2011, according to public financial records.
"In terms of what percentage of assets it can be — that is kind of limited — but as long as the credit union is growing, we can lend," said Tim Garner, marketing director at DCU.
Like other credit unions that are close to the cap, DCU lenders have to calculate their loan portfolio-to-asset ratio each day. But though Garner said there's certainly enough demand to well exceed the cap, he said DCU has never had to turn away a credit-worthy applicant.
Loan participations, in which credit unions sell pieces of loans to other credit unions, have become a vital way to still generate revenue while being up against the cap, he said.
Growth Isn't Everything
Webster First has also seen significant asset growth, largely due to four acquisitions in 2011 and 2012, including Fitchburg Federal Credit Union.
The mergers added roughly $150 million to Webster First's assets, raising its lending cap by more than $18 million.
"That has allowed us to allocate more available funds to the commercial lending area," CEO Michael Lussier said.
Though Webster First has a bit more breathing room, Lussier said he expects to be up against the cap again next year.
Lussier, chairman of the National Association of Federal Credit Unions (NAFCU), which has lobbied Congress for an increase to the cap, would like his lending cap to jump like that every year, but he admits that credit unions can't rely on such steep asset growth.
"You can manage the cap through growth, but growth is not always the right thing to do," he said. "You have to use funds smartly."
'Extremely Disappointing'
The lending cap was put into place by Congress in 1998, when it passed a law that allowed credit unions to expand their potential membership. Lobbyists for credit unions and banks have been squabbling about the cap since.
The American Bankers Association argues that raising the cap would give credit unions an unfair chance to eat into banks' lending market share because credit unions are exempt from paying federal taxes. And banks argue that they have plenty of capital to lend, but there's low demand for loans.
Meanwhile, credit unions argue that their average business loan size is smaller than that of banks, and that there are small businesses that have struggled to find credit because of what they say are tighter lending standards among banks.
So far, the banking industry is winning this particular battle.
Joseph Barbato, CEO of Millbury Federal Credit Union (MCU), which is also nearing the lending cap, grew frustrated trying to lobby Congress to increase it. He said it's "extremely disappointing" that Massachusetts lawmakers haven't co-sponsored recent legislation to raise the cap.
Barbato said he sometimes doesn't understand the divisiveness he reads about between credit union and banking lobbyists in Washington. He said he gets along just fine with area bank executives.
And with an average commercial loan size of about $240,000 in 2012, Barbato feels he's targeting a different market than many banks.
"I'm respectful of bigger banks," he said. "We need the Bank of Americas very much so. A smaller bank can't build the (TD Garden) or a $50 million dormitory for a state university."
Despite his frustrations, Barbato said business lending remains important to his credit union's financial health. Through the third quarter of 2012, MCU had a member business loan balance of $28.8 million, or about 10 percent of total assets.
We're very committed to member business lending," Barbato said. "We believe we should be in this business."
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