(Editor’s note: This is the final installment in a series of stories examining the proposed creation of the Small Business Lending Fund.)
The Michigan Credit Union League isn’t exactly enamored with the Small Business Lending Fund that President Barack Obama has proposed — and not just because he hasn’t included credit unions in his program.
The MCUL believes his proposal is déjà vu all over again, and, like its predecessor, it won’t work.
The president has proposed taking the $30 billion that has been returned by some of the nation’s largest banks from the controversial Troubled Asset Relief Program, initiated by the Bush administration, and deposit those funds into the SBLF. Those dollars would then be made available to the country’s community banks with assets under $10 billion as capital to loan to small businesses. Congress has to authorize the use of the money in that fashion for the proposal to go forward.
“First, it excludes credit unions, and credit unions have been the ones that are stepping up their business lending. The second reason we’re opposed to it is, we just don’t think direct capital infusions in banks is what the public wants. And from past experience, we don’t think that it will work,” said David Adams, MCUL CEO.
Adams strongly feels that SBLF won’t work because TARP hasn’t accomplished what it supposedly set out to do: get capital flowing into the nation’s economy to help prevent businesses from closing and the unemployment level from rising, following the sub-prime mortgage fiasco and subsequent financial crisis.
“What we’ve learned from TARP 1 is that investing money in banks doesn’t necessarily mean that it will make it down to Main Street, because they used those funds to strengthen their capital levels on their balance sheets that are very weak right now,” he said.
“It doesn’t really provide an incentive to them to make small business loans. It didn’t work the first time, and we don’t think it will work a second time.”
Adams feels just as strongly that excluding credit unions was a mistake, at least for his member organizations in Michigan. Here, he said, the most recent data revealed that the volume of small business loans made by credit unions was up by 22 percent last Sept. 30 from a year ago. Adams said similar data issued by the Federal Deposit Insurance Corp. revealed that bank lending to small businesses had declined over three-quarters that same year.
“So this proposal would exclude credit unions, who happen to be the very ones who are actually making these loans right now,” he said. “And the public is rightfully up-in-arms about government funding being used to shore-up banks without any guarantees that the money will get down to Main Street. ”
According to data compiled by the Credit Union National Association, 44 percent of the state’s credit unions offered business loans in September 2009, compared to 28 percent nationally. In 2005, only 29 percent of Michigan’s credit unions offered loans to small businesses.
The MCLU, which has 334 members and total assets of $37.4 billion, has an alternative to the president’s proposal. Adams said any federal money designated to small business lending should go toward reducing the risk that banks and credit unions face in making loans. He said the state offers a model the Fed could follow in the Capital Access Program offered through the Michigan Economic Development Authority.
The loans made under CAP are private transactions between the lender and the borrower, as the MEDC doesn’t play a role in the lending decision or the interest rate charged. But the lender, borrower and the MEDC pay a small premium into a reserve fund that reduces the risk for a lender. According to the agency, CAP has provided funding to more than 9,700 businesses that generated about $550 million in loans.
“Over the history of the CAP, it’s been leveraged by a 27-to-1 ratio. … So when a bank or a credit union makes a loan, there is a little bit of a buffer in case a loan defaults,” said Adams.
“And we would much rather see the federal government use funds that would either be in the form of grant money that would come back to the states for programs like CAP, or, perhaps, create a federal fund that would help banks and credit unions with those kinds of risks.”
Adams said there is a proposal in Washington, D.C., that would help credit unions make more loans to small businesses. Bills in the House and Senate would double the lending cap credit unions have to make small business loans and raise the amount of a loan by five times before it would count against the cap.
“This legislation would raise what is called the ‘de minimis threshold’ from $50,000 to $250,000. So if the legislation passes, a lot more small business loans can be made by credit unions because anything under $250,000 won’t count under the cap, and the cap will be raised from 12.25 percent to 25 percent. And this is the type of legislation that won’t cost taxpayers a dime,” said Adams.
CUNA said the legislation would inject an estimated $10 billion worth of small business lending credit into the economy.
“That cap was put into place in 1998 due to lobbying by the banking industry,” said Adams. “So ironically, the bankers successfully put a limit on small business lending by credit unions. Now they’re not making loans and we are.”