Credit unions gun for more traditional bank business

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A push by credit unions for more leeway with small-business lending is fueling an old fight with their banking rivals.

Credit unions, formed in the United States early in the 1900s mostly to help people with limited resources access loans, have steadily increased business lending over the last decade. Some, including credit unions in Indiana, are near a federally mandated cap on such loans.

And now they’re lobbying Congress to raise that cap from the current 12.5 percent of assets to 27.5 percent. Bills filed in the House and Senate this year would do just that.

It’s a move credit union advocates say would give small businesses, which make up the lion’s share of credit union business borrowers, more choices for securing capital.

“Businesses need access to credit, and they need as many options as possible at the best possible rate,” said John McKenzie, president of the Indiana Credit Union League, who addressed the issue with Indiana’s congressional delegation in a visit to Washington, D.C., on May 5. “Credit unions stand to do more business lending.”

Banks, however, see the push as another move by credit unions to edge into their turf. And they’re doing so, bankers say, with a big advantage.

As not-for-profit cooperatives with no shareholders, credit unions are exempt from paying the federal corporate income tax, which tops out at 35 percent.

Expanding business lending would give credit unions another tool to broaden a mission from which bankers say they’ve already strayed.

“They’re not supposed to be equal with banks,” said Joe DeHaven, president of the Indiana Bankers Association, which represents the state’s community banks. “They earned their tax deduction by serving individuals with modest means. They weren’t supposed to be making business loans. They weren’t supposed to be serving high-income individuals.”

In Indiana, DeHaven fears expanding the cap could open the door for some of the state’s 188 credit unions to ratchet up their business-lending game.

And some experts agree that raising the cap would result in more lending—in higher amounts.

“It’s just a question of when, I suspect, more than if,” said Bill Kelly, a former banking professor and economist for the Credit Union National Association, who now consults with banks on credit-union competition in Madison, Wis.

Growing market

Most credit unions entered the business-lending market in the mid-1990s after getting heavily into mortgages in the 1980s.

Kelly said the number of savings accounts was growing faster than loans for many credit unions. Issuing capital to credit union members to run or expand their small businesses became another way to lend. In order to borrow, a business owner must be a credit-union member, but there’s wide access to membership.

Congress set the 12.5-percent loan cap for credit unions in 1998.

The majority of credit union loans are still relatively small—$240,000 on average—and nationwide they provide about 4.5 percent of all business loans. But their market share, both nationally and locally, is growing. In Indiana, credit unions’ business loan volume grew from $988 million in 2007 to $1.5 billion last year.

By contrast, commercial and industrial loans issued by Indiana banks declined from $9 billion in 2007 to $7.5 billion last year.

credit unionsSome banks with an Indiana presence have increased small-business lending in recent months as they’ve pushed to capitalize on flickers of resurgent demand.

But the overall decline reflects a recession in which loan demand was sluggish and banks, faced with heightened regulatory scrutiny, were cautious to lend.

Longtime commercial banking lenders also were preoccupied with old problem loans during the recession, said John Reed, a banking industry expert with the local office of Chicago-based investment firm David A. Noyes & Co.

Meanwhile, credit unions, as relative newcomers to the business lending arena, were mostly unencumbered by such loans and therefore able to focus on getting more business loans.

“They’re not dealing with sins past; they’re creating [loans] future,” Reed said.

Higher-cap impact

In Indiana, about 10 credit unions do roughly half the state’s credit-union business lending, and most of them are approaching the cap, McKenzie said.

Among them is Indianapolis-based Forum Credit Union, which forged its way into business lending in 2002, in part to meet a demand among members who already were getting consumer loans from Forum.

A couple of years ago, the credit union came close to capping out with about 11 percent of its assets in business loans. That number has dropped slightly—to 9.75 percent—as deposits have grown and some borrowers have refinanced.

But Andy Mattingly, Forum’s chief marketing and retail officer, said he has to remain vigilant that Forum’s numbers don’t fluctuate.

Lifting the cap, he said, would allow the credit union to continue aggressively going after dual deposit and loan customers—without the pressure of approaching the business loan limit.

“We would do the same thing we have been doing,” Mattingly said. “We’re trying to build a relational approach where we’re getting the deposits and the loans.”

In most cases, Forum, which provides loans primarily in the $750,000 to $2.5 million range, is competing with two or three banks for the business.

That’s precisely what banking advocates such as DeHaven worry about. If the cap were to be lifted, he said, some of the more aggressive unions would follow a similar course.

That wouldn’t expand availability of credit, he said, but would lure customers from banks to credit unions.

The impact “is going to be determined almost market by market,” DeHaven said. “Where there is a larger credit union that’s expansionary-minded, they’ll have the tax advantage to be able to try to attract some of the good business that already exists at banks.”

McKenzie, however, said credit unions’ share of the market is so minuscule that even if it doubled, banks would still dominate 90 percent of it.

Over time, though, that might not be the case, Kelly said. Credit unions now mostly serve a niche of smaller loans for which some banks don’t bother to compete.

But as credit unions get more leeway to lend, they could take on larger business loans, a move that would make them more directly competitive.

“Banks have found that credit unions have been tough competitors with consumers,” Kelly said. “Maybe today they can’t do big loans, but that could change.”•


  • More Misdirection
    That was some great misdirection MCH. OK, read my post and replace "windfall profit" with just "profit." I won't argue that windfall was an inaccurate use of the term in my comment, I might have gotten a little over-excited; but I will argue that your rebuttal is over-stated given the length you write about that one word.

    No one is arguing that profit is bad. We're arguing about when and how it should be taxed. The government has said that when a corporation is small (as in sole proprietor) or mutually owned (as in credit unions), the profits should be taxed through the owners' personal income taxes and not through the coporate income tax. You try to argue from the principal of fairness, but you're comparing apples and oranges. At banks, small groups of people earn huge profits from work and not from mutual assistance. At credit unions, large groups of people earn comparitively tiny profits through their shared ownership and financial partnership. Congress rightly sees and respects the difference, which is just shocking from politicians.
  • Windfall Profits??
    Matt seems to be educated on some things, but he lost me completely when he defined windfall profits. He seems to think that having any money left after operating expenses constitutes a windfall. When I studied history and economics, I was taught that the purpose of a business was to provide a service or product of value and have some money left over after covering expenses. You know, making a profit. If a business cannot do this consistently, they will cease to exist, and with them all the payroll taxes, benefits, and jobs that the business generated. The definition of windfall profits is - profit that occurs unexpectedly as a consequence of some event not controlled by those who profit from it. So I guess Matt thinks that all businesses that make "profits" do it unintentionally. Profit is not a dirty word; it is one of the driving forces of a free enterprise system. Even a credit union has to end up with money left over after expenses, or eventually it will be closed by the regulators. Whether you call that money profit, reserves, or dividends, it must be very important to the CU's, or else why do they hire former news anchors/applicance salesmen to continue to expand their customer, oops - member, base? Allowing one participant in the "banking" marketplace to offer the same services as another, but to avoid paying income taxes is tilting the playing field in a manner that is unnecessary, perhaps even un-American.
    • 501(c)(14)
      Banks are trying to manipulate the argument by making you feel sorry for them. They are intentionally obfuscating the argument and leaving out important information.

      Notice that they try to convince you that credit unions don't pay any taxes. Itâ??s not true. Credit Unions pay payroll taxes, property taxes and sales taxes. They also pay UBIT (Un-related Business Income Taxes) on anything that doesnâ??t smell strongly of financial services. In fact, the only tax credit unions donâ??t pay is income tax on their windfall profits (or profits above and beyond operating expenses). They should clarify this more carefully because it is an important distinction; but it wouldnâ??t help them persuade you. In fact, the Credit Union National Association has estimated that the total income tax for all 8,000 credit unions across the nation would only amount to about $1.5 billion annually. Thatâ??s a very small sum on the scale weâ??re talking about, because credit unions only make up 6% of the entire financial services industry in the US.

      Banks also obfuscate the truth about why credit unions are tax exempt. They say the exemption is based on the fact that credit unions help the little guy. The tax exemption is the result of credit unionâ??s not-for-profit structure and volunteer board of directors. Under the IRSâ??s Internal Revenue Code Section 501(C)(14), credit unions are classified as not-for-profit because they are â??operated for mutual purposes and without profit to provide reserve funds for, and insurance of, shares or deposits.â?? Contrary to what someone else wrote, they are not in it for the money. They are not legally allowed to retain earnings except as reserves for future investment in the credit union itself. All â??profitsâ?? above and beyond what needs to be retained for prudent planning are returned to members in the form of dividends, which is then taxed through the individualâ??s income tax filing!!

      Donâ??t let big Wall Street banks make you feel sorry for them. Under the Federal Credit Union Act, they could convert to a credit union if they wanted to â??take advantageâ?? of the tax exemption. But why stop lining their pockets with your money?
    • Relationship Building
      I have had an account at a credit union for over 20 years and until they do me wrong, I always will. However there is not a fair playing field when one entity does not have to pay federal or state taxes. If a CU wants to play in that arena, then they need to follow the same rules as banks. Pay your taxes. I also have accounts at a community bank and it is paying 3% on my checking AND paying its taxes! They know my name, they know my family and they support my community. Don't lump the community banks in with the BIG Banks that encouraged this financial mess that we're all paying for in one way or another.
      • Structure makes CUs different
        It's the structure of credit unions that makes them different than banks - not the services offered. Credit unions are owned by their accountholders, not outside stockholders. Any profits are distributed back to credit union owners (accountholders). That's the basis for their not-for-profit status. There is no unfair advantage. The structure is simply different.
      • CUs lost their way
        As a former employee and a long time CU member I feel that many credit unions have lost their way. People helping People is just a marketing tool not a fundamental principle anymore. If it were Overdraft protection would never have entered the vocabulary of CUs.
      • One or the other
        I'm employed by a CU and I still believe that tax exemption and a cap lift would be an unfair advantage over community banks. I don't think there's an advantage any institution could possess over major corporates because of their resources and visibility. I think we should either see continued tax exemption or increased cap on MBL, but banks should note that if tax exemption takes a dive, the market will be saturated by credit unions switching charter to banks.
      • No Profit
        Credit Unions are great and they DON'T make a profit. There are no shareholders, no dividend payments, instead the money is used for its members. For example at Forum I actually get PAID interest over 2% for my checking account, where I get charged a $5.99 fee at Old National because they have to make money for their shareholders and corporate bottom line so their stock price doesn't tank.
      • Fair competition?
        That's sweet, Lydia, but why should credit unions enjoy the significant tax advantage. Both entities are in business to make money, make no mistake.
      • Indiana Independent
        Credit Unions are like banks & S&Ls used to be: they know their customers by face and name, and offer service based on customer service and loyalty. They are your local banker, unlike the large impersonal institutions most of us have to deal with now.

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