State credit unions expand SBA lending
By Elizabeth Geldermann, of SBT
Since the US Small Business Administration (SBA) passed a regulation in February to allow all stable credit unions with sufficient funds to become certified lenders of SBA loans, southeastern Wisconsin banks have been keeping a suspicious eye on their credit union counterparts.
SBA loans are guaranteed up to an average of 75% through SBA funds to support small business growth.
Credit unions had been able to provide loans through the SBA prior to the new regulation, but depending on the experience of the credit union and the stability of the lender, loans were difficult to approve.
Currently, only 30 of the 300 credit unions in Wisconsin participate in SBA business lending, but that number may soon rise as more credit unions tap into the market with the new, relaxed restrictions.
The SBA extended the lending program to eligible credit unions in hopes of enhancing the small business community, but the decision brought protests from the American Bankers Association (ABA).
By participating in the business loan program, credit unions are violating their original mission, according to a statement on the ABA’s Web site (www.aba.org).
Expansions, increased financial services and competition against banks are not in accordance with the original concept of credit unions as small groups of people pooling money to help each other, the ABA contends.
As credit unions begin to act more like banks with branch locations, extended membership to anyone living or working within a given radius and nearly full financial service capabilities, credit unions pose unfair competition for the same customers banks target, the organization states.
The ABA argues that credit unions now consist of unrelated groups and that some have grown to serve entire states.
Charlotte Birch of the ABA said banks don’t mind the competition; they just want it to be a fair fight. Banks are subject to more stringent regulations, she said.
Credit unions, as tax-free enterprises, are not required to adhere to regulations such as the Community Reinvestment Act, which mandates a yearly quota of community service, sponsorship or investments banks must contribute to their service area.
"Credit unions have different regulations under state, federal and tax laws, which per bank give the credit unions a distinct advantage over other lenders product cost wise," said John Mirenda, chief of finance for the SBA. "The banks will argue that they are subjected to higher costs of doing business vs. a credit union."
Brett Thompson, president and chief executive officer of the Wisconsin Credit Union League, said that although credit unions are expanding, all additions to services and locations are the result of the members’ demands and stem from the credit unions’ original mission: to serve members. Thompson said the ABA’s attacks on credit unions are self-serving and illogical.
"A credit union is exempt from tax because of its form – member-owned and non-profit. Not because of the services it provides," said Thompson. "It is a classic case of supply and demand. The membership asked for small business loans, and that is why we are trying to supply them."
Thompson said that many credit unions in Wisconsin could be eligible to provide SBA type lending. However, most are too small to meet the requirements in a way that is financially viable, he said.
Thompson said credit unions are viable alternatives to banks.
"Unions are better known for service and the best deals," Thompson said. "Because our whole focus is not profit, ultimately you will see more folks that need loans for their small businesses going to credit unions, because it is a better deal and ultimately they receive better service."
Wisconsin credit unions are growing and stacking up to banks, but still focus on consumer lending, Thompson said.
According to Thompson, short-term loans are still the bread and butter of credit unions.
Landmark Credit Union is the largest in the state with 100,000 members, 11 locations in nine counties, and $698 million in assets. Landmark approved its first business loan in August in response to a member inquiry.
Jay Magulski, vice president of Landmark, said the credit union has always aggressively pursued opportunities to help small businesses, and joining with the SBA was one answer.
In the past, potential customers had asked about small business loans, but the credit union could not always help them, Magulski said.
"Our goal as an organization is clearly to be a one-stop financial provider and solution provider for our members," said Magulski. "We want (our members) to realize this and view Landmark as a financial provider for all of their needs."
Landmark had not yet advertised its new partnership with SBA when Marji Fagan inquired about a $150,000 loan toward an addition to Hair Decisions & Nail Salon, her business in New Berlin.
Fagan said she originally went to her local bank but was given "the runaround," although her business was already running and successful.
"In a lease situation, when you lease and build an expansion, your assets are your business and your equipment," said Fagan. "But the bank wanted me to take a home equity loan out instead, which I did not want to do. They said that an SBA loan was too much paperwork."
Fagan called Landmark because the credit union had previously helped her with a car loan. Fagan said she could not be happier with her decision.
"The lenders were on top of everything and worked very hard to keep the interest rate low," said Fagan. "They contacted us if they needed more information, instead of us having to find them, and the closing costs were lower than anticipated."
John Mirenda, chief of finance for the SBA, said most credit unions want to participate in SBA lending in an effort to become a full-service financial institution for their members, beyond savings accounts and home loans. According to Mirenda, SBA loans have gained popularity as credit unions expand their markets.
"(Credit unions) realized that over the years they were losing a part or sometimes all of their customer accounts to banks because they couldn’t or wouldn’t offer other services," said Mirenda.
Birch claims that credit unions are still double-dipping by acting like banks, without having to comply with the same regulations.
McCollum suspects credit unions are using extra money from tax exemptions for advertising and developing better facilities.
Ultimately, customers such as small-business owners are the benefactors of the ongoing competition between banks and credit unions, Magulski said.
"The competition is a good thing, and the best thing for the customer," said Magulski. "I think people would find that they are very pleased that this has happened, that now they have harder decisions to make."
Oct. 17, 2003 Small Business Times, Milwaukee