Raising the limit on how much credit unions can lend to businesses would give a boost to the economy, without costing taxpayers a cent, according to Sen. Kirsten E. Gillibrand.
The New York Democrat is backing the Small Business Lending Enhancement Act, a bipartisan bill to lift restrictions on credit unions, allowing them to more than double their small-business lending. She said the act would create more than $9.4 million in additional business lending in Western New York in one year.
But the banking industry is lining up against the idea. Banks have long complained that the nonprofit, member-owned credit unions have a competitive advantage over them, because credit unions don't pay taxes but still compete for many of the same customers as banks.
Until that playing field is leveled, bankers say, credit unions should be limited to their original mission of serving individuals "of modest means."
"Credit unions should demonstrate they are meeting the basic statutory mission for which they were created before attempting to expand their powers into more complex and specialized fields," said Salvatore Marranca, president and CEO of Cattaraugus County Bank and former chairman of the national Independent Community Bankers of America.
"This proposal would only serve to further exacerbate the already unfair marketplace and provide tax-exempt credit unions an even greater competitive advantage over local community banks that pay their fair share of taxes," he said.
Gillibrand said freeing up the credit unions would make up for the difficulty that startup and small businesses have had in getting access to capital from banks in recent years.
In all, she said, the legislation could result in $10 billion of new lending nationwide, generating as many as 100,000 new jobs from small-business growth. In New York alone, it could produce $1 billion in lending and 11,000 jobs, Gillibrand said.
"Government doesn't create jobs. Businesses do. Ideas do," she said on a conference call. "Young budding entrepreneurs are without the capital they need to grow."
As part of a compromise in a 1998 law that expanded credit union membership, lawmakers capped "member business loans" by credit unions at 12.25 percent of an institution's assets. There was no limit before.
The pending legislation would more than double that cap over time to 27.5 percent of assets, with institutions gradually increasing their lending in tiers, if regulators approve.
Within the state, there are 422 credit unions, including 108 in Western New York – the most of any region in the state. Unlike other areas, most of those in this region are quite small, with a total of 397,370 members, so the lending increase that Gillibrand's office calculated is just $9.4 million.
"Small businesses drive this country, and the more help that credit unions can provide to small businesses at no cost to the taxpayer is a win-win situation," said Ann Brittin, CEO of Lockport-based Cornerstone Community Federal Credit Union, the largest locally. "It only makes sense to allow them to continue providing that service since there is no valid reason for the limitation."
But bankers say that such action isn't even needed, because only about 2 percent of all credit unions are at or even near the current cap in business lending. And the cap provides exemptions for loans under $50,000, loans up to $5.5 million that are backed by the U.S. Small Business Administration and loans secured by the borrower's home.
"The credit union industry is using the fragile economy to justify increasing their business lending authority," Marranca said. "This controversial proposal would benefit only a handful of overly aggressive, growth-at-all-cost credit unions and allow them to use their generous tax subsidy to unfairly compete with taxpaying local community banks, thereby severely hindering our ability to serve our communities."
Local community bankers also reject the contention that they aren't lending, saying the problem isn't their willingness or available capital, but the lack of loan demand and poor creditworthiness of the borrowers.
Evans Bancorp, for example, has done more than $10 million in government-backed small-business loans for three straight years and is finishing a record year in terms of overall lending for the bank. One-third of loans this year have been to small and middle-market businesses.
"We're doing more than our fair share today," said David Nasca, Evans president and CEO, who also is chairman of the Independent Bankers Association of New York State. "We're looking for more borrowers, so to say that they're not getting loans because banks aren't lending is misguided."