WARREN, Mich.-Not every credit union in the country is on board with increasing the cap for credit unions on member business lending.
At least three have written letters to Congress urging legislators not to pass legislation that would increase the cap to 27.5%, saying it poses a threat to the NCUSIF and may well lead to higher assessments for years.
Dale Kerslake, CEO of Cascade FCU in Seattle, and Dennis Moriarity, treasurer-manager at Unity CU here, last week joined Stuart Perlitsh, CEO of Glendale Area Schools FCU in Glendale, Calif., in sending letters to Senate Majority Leader Harry Reid (D-NV), Senate Minority Leader Mitch McConnell (R-KY), Chairman of the Banking, Housing and Urban Affairs Committee Tim Johnson (D-ND), and Richard Shelby (R-AL), ranking member of the Housing and Urban Affairs Committee.
Letters from all three execs shared concerns that many credit unions lack the expertise and skill to effectively expand their business lending, some pointing to business loans that helped topple large CUs recently, such as Telesis Community CU.
The letters suggest it was expansion of corporate CUs' investment powers that led to that system's collapse and to the assessments that continue today. Kerslake urged legislators against passing a bill that could lead to "the next CU industry crisis."
Paying For Others' Mistakes
Moriarity wrote "the exposure is to our reserves and retained earnings, which could eventually be confiscated to pay for the mistakes of lenders who are unfamiliar with the complexity of business lending or who might ignore risks in pursuit of revenues."
Moriarity told Credit Union Journal that with most CU investments paying very little, some credit unions may be tempted to become aggressive with business lending in an effort to chase yield.
"We are being severely pressed by corporate stabilization expenses now, and I am afraid this expanded authority could lead to a lot of credit unions doing business lending who are probably not prepared to do it properly, and in a way that would safeguard those of us who will end up paying for their mistakes," Moriarity said.
Perlitsh told legislators that "one hundred twenty-nine credit unions are reporting an astounding 10% default rate on their member business loans," and pointed to an NCUA Inspector General report in 2010 that concluded business loans were a factor in seven of the 10 costliest credit union failures during the recent financial crisis.
"By their very nature in the size of their assets, (the majority of credit unions) don't have the expertise in house to expand their business lending programs," Perlitsh said.
All three CU execs agreed that if the Small Business Lending Enhancement Act is passed and raises the MBL cap to 27.5% of assets from 12.25%, additional safeguards are needed, in addition to those already proposed in the bill, such as allowing MBL growth only to move up by a certain percentage each year up to the new cap. The CEOs suggested that expand their MBLs should be held to a different standard.
"My view is that if you are going to take on more risk you pay a higher premium. And if you are going to get more involved with riskier lending, doesn't it seem natural that you should reserve more?" Moriarity said. "There are about 7,000 credit unions in the U.S., and to give all of them this expanded authority you will have some bad actors. I want to be protected from them. I don't want to go running pell-mell into this activity."
What Perlitsh contends, as do Kerslake and Moriarity, is that the MBL legislation is being driven by larger credit unions that are more influential within the two major trade associations, which have made passing the MBL bill a priority.
"There are slightly more than 5,000 credit unions that do not make business loans and less than 30 credit unions are near their member business loan cap," wrote Perlitsh.
In an interview with Credit Union Journal, Perlitsch said, "I believe there is a significant number of credit unions that do not desire to see the MBL capped raised," a point with which Kerslake agrees.
Trade Groups Respond
CUNA spokesperson Pat Keefe said the trade group is aware some CEOs have raised objections.
"Everyone is entitled to their opinion, and not everyone sees business lending as a critical part of their product offering, at least at this time," said Keefe. "However, by our count, Congress has been contacted about 60,000 times over the last three to four weeks by credit unions in support of more authority for business lending. So, there appears to be support for this effort. As for the tail wagging the dog, this legislative proposal has been around for the last several Congresses and has been something our members have told us they want."
NAFCU President Fred Becker told Credit Union Journal that while it is beneficial for the CU community to have its executives watching carefully over new rules and regulations, he suggested not enough attention is being directed by those questioning the MBL cap hike to the lending restrictions that are part of the MBL bill.
"Never say never (that problems could occur), but the restrictions in this bill are pretty stringent," said Becker. "That's what I think people should consider, and also the fact that most people in the credit union industry support this bill."