Letter to Senator Olympia Snowe regarding SBA 7(a) Loan Program
May 19, 2003
The Honorable Olympia Snowe
Senate Committee on Small
Business and Entrepreneurship
428A Russell Senate Office Building
Washington, DC 20510
Attention: Ms. Lindsey Ledwin, Clerk
Dear Madame Chair:
I really appreciated the opportunity to visit with you prior to the Roundtable on the Small Business Administration's 7(a) program that you convened April 30, 2003 under the auspices of the Senate Committee on Small Business and Entrepreneurship. I was pleased that Mr. Michael Hearne, a former chief financial officer at the Small Business Administration, and currently the Treasurer of Lafayette Federal Credit Union in Washington, DC, as well as a consultant to CUNA, was able to participate in your discussions on CUNA's behalf.
CUNA Supports Sen. Snowe's Leadership
Your leadership on this issue is very important, not only for financial institutions, such as credit unions, which originate business loans for their members, but also for the small businesses in this country that are so vital to our economy. As you know, over fifty percent of those employed in this country work for a small business, which has less than 500 employees. Such businesses generate up to 75% of the new jobs offered in the United States. Yet, over 80% of small businesses rely on credit, often unsecured, high-rate credit card loans, to finance their operations.
Credit Unions Can Play An Important Role in Lending to Small Businesses
I believe that credit unions can play a significant role in helping to provide much-needed credit for small businesses. I would like to be clear on what I mean by that. Contrary to the misinformation that banker groups are disseminating, only about 1,500 credit unions today make business loans, which can only be provided to members. Also, the average size of a credit union member business loan is about $110,000. Credit unions are not seeking to make speculative commercial loans, as some banker representative have charged, but rather want to respond to a growing need for loans to small businesses that is not being met today.
SBA's 7(a) Program Now Includes All Types of Credit Unions
CUNA is a strong supporter of the Small Business Administration's 7(a) program. However, until recently, most credit unions were barred by an agency legal interpretation from participating in the program.
With the full support of the SBA Administrator, Hector Barreto, who has encouraged credit unions to become involved in 7(a) lending, the General Counsel of the SBA issued a new legal opinion that allows all credit unions, regardless of charter type, to apply for 7(a) status. CUNA strongly supported the SBA's new interpretation and believes over time that it will enable a number of small businesses to obtain financing that they may not have been able to obtain using a commercial bank.
CUNA's Program to Support Small Businesss Lending
Following SBA's announcement of its new interpretation regarding credit unions, CUNA formed an alliance with Newtek Small Business Finance, Inc., a lending service provider committed to assisting small businesses. Led by a former senior SBA official, John Cox, Newtek offers a range of services. As a Small Business Lending Company, it can actually originate a business loan to a qualifying enterprise referred by a credit union. Newtek also offers valuable assistance in underwriting, servicing and liquidating business loans.
Quite frankly, most credit unions do not make business loans, for a variety of reasons. Often, small businesses do not know they can turn to their credit union to obtain much needed funding for their operations. Also, credit unions may not feel they have the resources to develop a member/small business lending operation.
However, CUNA believes this situation is changing as a result of several factors. Small businesses need a source of funding for loans that are around $100,000 or even less. While the need for such loans is growing, the demand for some traditional types of loans such as auto loans, other consumer loans, and mortgage loans, is not as robust as it has been at some credit unions.
Legal/Regulatory Factors that Hinder Member Business Lending at Credit Unions
I believe two regulatory factors will facilitate member business and SBA lending at credit unions. I have already mentioned the new interpretation from the SBA. In addition, the National Credit Union Administration has proposed a new rule for member business lending that will make it easier for credit unions to serve the needs of their small business members.
That said, however, there are still obstacles that thwart SBA and member business lending at credit unions. There is a 12.25% of total assets statutory limit on member business lending at credit unions, which is a significant restriction other financial institutions do not face. CUNA wants to work with Congress at the appropriate time to expand or eliminate this limitation.
Also, in CUNA's, view SBA 7(a) lending at credit unions would be enhanced if several improvements were made including centralizing the approval process for 7(a) applicants and streamlining the loan participation process to help support and provide the capacity for a larger number of small business loans made through participating institutions. We want to continue working with the SBA and Congress to achieve these results to benefit small businesses as well as financial institutions.
Some credit unions have expressed concern about the processing of their 7(a) applications. We believe the SBA is aware of these concerns, and we encourage them to take steps to approve eligible applications in a timely manner.
Credit Unions' Member Business Lending Has Been Thoroughly Reviewed by the Treasury Department
Before closing I want to address a statement made by a banker representative at your Roundtable, which may have left a false impression about credit unions. The individual indicated that banks are concerned that some credit unions may jeopardize the 7(a) program because their default rates may be higher than banks on member business lending.
In 2001, the U.S. Department of Treasury, at the direction of Congress, issued a study of member business lending at credit unions as compared to commercial lending from banks. The study shows that the delinquency rate and default rate for credit unions' member business loans are lower than those for commercial banks. The study, which is very thorough, may be found at Treasury's website at http://www.treas.gov/press/releases/reports/mbl/study.doc
In closing, CUNA appreciates the opportunity to place these additional statements in the record of your Roundtable on the SBA's 7(a) program. I look forward to visiting with you again in the near future about this and related credit union issues.
Daniel A. Mica
President & CEO