Regulatory Constraints Making Credit Union Business Lending Difficult
By Gina Ragusa Credit Unions Online
Since the economic collapse, regulatory demands have created a chokehold on the country’s financial institution industry, wrapping many credit unions and banks in red tape; they’ve experience paralysis from granting much needed loans to many emergent companies.
Where has this left the small to medium sized business? In the cold and folding quickly. Many have sought the solace of a credit union, typically willing to examine the entire business plan and not base a decision solely on profitability. However with the credit union business loan cap, many credit unions’ hands are tied.
“Many of our business members have either been turned away by big banks or found them difficult and/or restrictive to work with,” says CEO, Teresa Freeborn at Xceed Financial Federal Credit Union ($750 million, El Segundo, CA). “One of our favorite business banking success stories is a dermatologist in our Southern California market who wanted to open her own practice. Big banks wouldn’t even return her phone calls!”
Freeborn says that the credit union’s business banking officer sat down with the customer to understand her needs and the type of business she was trying to create. “As part of this process our business banking officer also worked with her to create a more comprehensive business plan. Knowing the strict requirements for getting an SBA loan approved has been a key differentiator for Xceed and helped this business member get access to money she may not otherwise have been able to obtain. We not only helped this member open her new practice, but we also helped to create five new jobs in this market. In November 2011, she was recognized as one of the ‘Top Doctors’ in the area by South Bay Magazine and today her practice continues to flourish.”
It’s stories like the physician member’s journey at Xceed that is helping to push Senate Bill 2231, which would allow credit unions to provide business loan services from 12.25% of the credit union’s assets to 27.5%. Proposed early last month, the legislation continues to sit while companies throughout the nation wither.
“If we can raise the cap it is estimated that $13 to $14 billion in new capital will be infused into the economy and create over 100,000 jobs--this is tax free stimulus,” explains Robert D. Ramirez, CEO of Vantage West Credit Union ($1.1 billion, Tucson, AZ).
A recent article in Forbes, “Too Big To Fail Banks Get Bigger, American Dream Turns Nightmare” discusses the missed opportunities and obvious solutions to helping to repair the economy.
The article points out how excessive regulations and restrictive lending standards have not only shattered the dreams of companies but has also driven a wedge between Main Street and Wall Street, exacerbating the issue.
Broken down in simplest form the solution seems obvious (taken from Forbes):
70% of U.S. economy is consumer spending
Consumer spending is directly correlated with jobs and employment
More than 65% of new jobs are created by entrepreneurs and small business
Main Street community banks and credit unions provide almost 60% of loans to these small businesses
Adding insult to injury, the Forbes article reports that the five biggest banks in America (Bank of America, JPMorgan Chase, Citigroup, Morgan Stanley and Goldman Sachs) are now 20% larger following the financial debacle than they were before. Meanwhile smaller financial institutions, unable to keep up with emerging regulations and demands are being dissolved.
Anne Benjamin, Executive Vice President & Chief Operating Officer for Redwood Credit Union ($2 billion, Santa Rosa, CA) speaks to what her credit union has encountered in terms of dealing with regulations.
“While many of the new regulations have been created to protect consumers from being taken advantage of, credit unions have always acted with their members’ best interests in mind and weren’t the cause of many of the issues, such as sub-prime lending that led to the economic downturn,” she explains. “Some of the regulations have impacted us by requiring additional paperwork or resources, which can mean significant cost increases for a larger credit union like RCU, but can also negatively impact smaller credit unions who may not be able to afford the resources necessary to comply.”
“Another unfortunate outcome of the regulatory environment is that some of these regulations which were created with the intent to help people have instead caused many of the large banks to raise fees and, in turn, cost consumers more money,” she adds.
Credit Unions Can Boost the Economy--if the Government Will Let Them
Ramirez says that he’s already seeing how providing loans will pump energy into the economy.
“We’ve experienced some really robust lending in Tucson,” he says. “We see members, now confident in the economy, come back less worried that something terrible will happen in terms of their jobs and homes. They are back to buying cars and homes…refinancing and improving homes and we are an avenue for that.”
He says that he’s heard members talk about endless waits and hurdles they have to jump when trying to finance with the larger financial institutions. “They seem to experience a lot of red tape when it comes to going to big national banks,” he says. “With us, its all local lending. When it happens here you get responses a lot faster than going to a national bank, which provides your member with more of an advantage.”
In terms of business loans, Ramirez says that Vantage West has offered commercial lending for approximately eight years and has a $40 million portfolio. “But we are looking to really grow the portfolio in the coming year,” he adds.
He says that Vantage West has grown a following with local entrepreneurs--the businesses the big banks don’t want. He says that one of his executives used to work at Chase and has echoed this sentiment.
“That’s our niche--small commercial loans to help these small entrepreneurs. They will generate jobs, which will create a win-win situation for everyone.”
Michael Downey, SVP of Business Services for Redwood Credit Union says that business loan demand continues to be strong and that growth is coming in two very specific areas.
“We’ve seen strong demand from businesses that have been able to weather the financial crisis by aligning expenses with current revenues,” he says. “Overcoming several years of losses and returning to profitability. These companies are typically left with the need to restructure their balance sheets, largely by refinancing debt that they have been carrying through the recession. We have effectively been able to help companies restructure for the future by utilizing the SBA 7a loan program. Small businesses continue to seek us out because we have put the programs in place that can help them.”
“Additionally, many small businesses are finding this is an excellent time to consider buying commercial real estate for their business,” Downey continues. “Interest rates are at an all-time low and purchase prices are very favorable. We have worked with numerous business people to help them accomplish this. Again, we utilize one of the SBA lending programs, in this case the 504 program to help make this affordable for our members. As mentioned above, small businesses continue to seek us out because we have put programs in place that can help them.” Downey adds that Redwood Credit Union is consistently ranked among the top SBA lenders in the San Francisco district, and we are an SBA Preferred Lender.
“Many of our members are small business owners, and we are committed to helping them find sustainable financial solutions so they can enjoy life, take care of their families and achieve their goals,” Benjamin adds. “During the recession, when many other lenders pulled back on lending, RCU continued to lend, guided by the same sound lending principles we have always followed. As a result, we were able to help many people and small businesses who weren’t able to find funding elsewhere.”
Xceed also continued to make loans when banks turned prospective borrowers away. “When bank lending dried up, we continued to lend to small businesses because we know our members; they aren’t just numbers on paper,” adds Freeborn. “We know their needs; we have the personal relationship that often began long before they started dreaming their American dream. We believe this is a key difference between banks and credit unions.”