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Sunday, 05 July 2015 22:00

Credit unions seek greater flexibility in business lending; Banks oppose changes

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Credit unions would have greater flexibility in how they structure business loans if a proposed change in federal regulations takes effect as written.

The proposal from the National Credit Union Administration would allow credit union loan officers to waive personal guarantees on member business loans, remove the 80-percent loan-to-value limits for collateral, and raise limits on construction and development loans.

While banks generally oppose the changes, credit unions welcome them for the flexibility they would provide their organizations when working with prospective commercial borrowers.

“It just gives us a little more latitude to personally structure a deal because the risks and the structures are all different, instead of a single playbook for every deal,” said Mark Hoffhines, senior vice president of commercial lending at Grand Rapids-based Lake Michigan Credit Union. “Every small business is different and every loan proposal is different.”

Lake Michigan Credit Union is one of the largest business lenders among credit unions in the state. At the end of the first quarter, the 249,000-member credit union had member business loans of $218.7 million, a 56 percent increase from $139.4 million a year earlier, according to a quarterly financial report filed with the NCUA.

The NCUA proposal is now subject to a 60-day public comment period that began June 18. The NCUA Board could finalize the rule change later this year or make alterations based on public comments.

Ken Ross, chief operating officer of the Michigan Credit Union League, believes a change in the federal rule could bring more business to credit unions that write business loans.

“It gives more flexibility to credit unions, which is going to make them more competitive in the marketplace, and that may result in more folks willing to kick the tires on their local credit union when they’re looking for a business loan,” said Ross, who served as the state’s top finance regulator prior to joining the MCUL.

Banks have long complained that credit unions hold a competitive advantage from their tax-exempt status and have noted that they do not have to follow the federal Community Reinvestment Act (CRA), which allows them to cherry-pick customers.

The Michigan Bankers Association recently noted a study conducted by Northwood University that said credit unions underserve low-income and moderate-income communities. The study said just 1 percent of credit union loans in 2013 went to low-income people. It specifically cited Lake Michigan Credit Union, one of the largest in the state, for writing just 56 out of 2,958 mortgages to low-income borrowers.

As large credit unions move beyond their traditional role as depository institutions and retail lenders to do more business lending — historically, the turf of banks — they should simply convert to a bank, pay taxes and comply with the CRA, said John Llewellyn, vice president of government relations at the Michigan Bankers Association.

“Clearly, this is where the larger credit unions are headed, to being bank-like structures. Their future is being a bank,” Llewellyn said. “I don’t think they need to go through these machinations of, ‘Oh, well, let’s create a new hoop so I can stay a credit union.’

“A wide, sound economic policy would say, ‘Hey, when you grow into this role … then you should become a bank’ because we already have those regulatory structures in place.”

Llewellyn and others who oppose the change also argue that it could lead to higher loan losses for credit unions involved in business lending and potentially cause problems for the financial system.

Camden Fine, the president and CEO of the Independent Community Bankers of America, a national trade association for community banks, called the NCUA proposal “basically an admission of the weak oversight and regulatory standards now in effect for credit unions.”

“Congress enacted credit unions’ business-lending caps for good reason — to limit risky lending and to restrict these tax-exempt institutions to their fundamental mandate of serving people of modest means,” Fine said.

Both Hoffhines and Ross say the notion of higher lending risk for credit unions under the NCUA proposal is unfounded. The NCUA proposal would only allow credit unions to waive the personal guarantee for business borrowers and use high loan-to-value limits.

Whether they actually do so depends on the circumstances of individual prospective borrowers, Hoffhines said. Credit unions have always made business loans following prudent underwriting standards and will continue to do so, he said.

“Credit unions have approached the member business loan fairly conservatively, if you really look at it. We have a good track record,” Hoffhines said. “It’s not like we’re going to change the focus. We’ll definitely still stay prudent and stay very good in our structuring.”

Lake Michigan Credit Union had a low 30-day delinquency rate of 0.06 percent on member business loans as of March 31 and a 0-percent 60-day delinquency rate. The credit union reported $299,329 in business loan charge offs, according to its first quarter NCUA report.

Statewide, the 274 credit unions in Michigan collectively had member business loans of $1.48 billion at the end of 2014 with low delinquency rates, according to NCUA data. They charged off $5.15 million in member business loans and had a combined 30-day delinquency rate of 1 percent, and 60-day delinquency rate of 0.48 percent.

Nationally, business lending by credit unions grew to $51 billion in 2014 from $4 billion in 2000, according to the NCUA, which described the proposed change as an attempt to modernize rules for credit union business lending.

“This is the right approach at the right time,” NCUA Board Chairman Debbie Matz said in a statement. “It’s appropriate to move away from prescriptive regulatory limits to general principles providing credit unions with greater flexibility to serve their member businesses. Commercial lending may not be appropriate for every credit union, but that’s a strategic decision for each board of directors to make. Credit unions know their members better than we do, and this modernized business lending rule reflects that reality.”

Read 4146 times Last modified on Sunday, 05 July 2015 22:36

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