Academic journal article ABA Banking Journal

Community Banks in All but Name?

Academic journal article ABA Banking Journal

Community Banks in All but Name?

Article excerpt

Walter Wriston once said, "If it quacks like a bank, it's a bank." He was talking about Merrill Lynch. Today, he'd be talking about credit unions as business lenders

The man came on just long enough to see who was calling and put me on hold. I've been listening to bad music now for going on four minutes.

Is this fellow really that busy? Or am I just not taking the hint that New York City's Melrose Credit Union doesn't want to talk to ABA Banking Journal?

Why am I surprised? I should be used to this kind of reception working on a story about credit unions' business lending.

Still holding. Stubbornly, I wait a minute or two more and then, miracle of miracles, the executive picks up.

Yes, he agrees, they have an interesting story to tell. This credit union specializes, as do several in New York, in loans for obtaining expensive New York City yellow cab licenses, called "medallions."

But no, he'd rather not tell it to ABA's publication.

It would seem that while the ABA didn't win every credit union battle, especially the big one in Congress that led to 1998's H.R. 1151, the Credit Union Membership Access Act, it left quite a rep behind.

Funny thing, too. Every time I do get through to the business loan department, I find myself talking to former bankers.

A growing source of competition

While H.R. 1151 went down as a major blow because it reinstated the ground that credit unions lost as a result of banking's Supreme Court victory in First National Bank v. NCUA, the act also imposed limits on credit unions' business lending. In spite of those limits--the efficacy of which were disputed as Congress passed them--national figures from the National Credit Union Administration indicate that business lending by credit unions continues to rise. Member business loans came to $3.9 billion for 1999, up 16%, and that follows years of increases.

Banks had better brace for more of the same. In early June, the Small Business Administration announced a cooperative effort with the National Federation of Community Development Credit Unions to encourage more community development credit unions to become SBA 7 (a) lenders. Already seven are and SBA hopes that can be brought to 50.

More generally, strong elements of the credit union industry are pushing for a moratorium on enforcement of the business lending caps. And in late July, NCUA Chairman Norman D'Amours announced support for outright repeal.

ABA has consistently opposed expanding credit unions' business lending capabilities. When NCUA first unveiled its member business rule, in response to H.R. 1151's requirements, ABA accused it of being so liberal in its interpretation of the law as to appear to be subverting it. "ABA is opposed to any expansion in credit union business lending authority," the association stated in a recent paper.

Sources of appetite

Why such strong interest in business lending from an industry whose roots are from in consumer finance owing its birth to a time when banks were lending?

Alan Theriault suggests several factors. He is a consultant who both helps credit unions convert to savings bank form (some of the largest credit union business lenders recently chose that path) and helps others to move into business lending as credit unions.

First, with the evolution of the U.S. economy, Theriault says, "credit union management is recognizing that a good portion of their membership is self-employed and needs financing." This affects not only community credit unions, he says, but also associational and occupational ones whose older members often have taken-up second careers.

Second, two of the mainstays of the credit union business, auto loans and credit cards, are now subject to such competitive pressure that it's hard, even for a nonprofit lender, to maintain a decent spread! And mortgage loans, once a very popular way for credit unions to expand, "have become a commodity item. …

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