MADISON, Wis. (7/29/13)--A few credit unions have carefully tested the waters of a federal program that helps financial institutions extend loans to small businesses that are creditworthy but do not meet standard lending criteria.
On Sept. 27, 2010, President Barack Obama signed into law the Small Business Jobs Act of 2010. The act created the State Small Business Credit Initiative (SSBCI), which was funded with $1.5 billion to strengthen state programs that support lending to small businesses and small manufacturers.
The initiative will allow states to build on successful models for state small business programs, including the collateral enhancement program, capital access program loan guarantee program.
Representatives from credit unions that participate in the SSBCI programs note that they aren't likely to attract a windfall of new member business loans, but they can solidify relationships that might otherwise be lost.
"We see these kind of programs as a benefit of membership," Robert Myles, senior vice president of lending and retail services at Telhio CU, Columbus, Ohio, told News Now. Telhio has made three loans totaling roughly $1.1 billion through the SSBCI's collateral enhancement program.
Prior to 2012 credit unions were not previously eligible to participate in the program because they could not accept public funds. The Ohio Credit Union League secured an agreement with the Ohio Department of Development to allow credit unions to participate in the state's SSBCI (News Now June 19, 2012.
Eligible federally insured credit unions can participate without taking deposits of public funds. A credit union still must guarantee 30% to 50% of the loan as a collateral shortfall, enter into a collateral enhancement agreement for credit unions, and meet reporting and other requirements.
"Basically what the state does is set aside a deposit for that amount as insurance, so if we had a default it would pay after liquidation up to that amount," Myles told News Now.
In Wyoming, Mich., My Personal CU, with $110 million in assets, has entered into one loan deal through the Michigan Economic Development Corp. collateral support program. The credit union provided a loan to a manufacturing company that was hit hard by the economic downturn.
"We worked with them and were coming short on collateral because back then the appraisals were pretty anemic, but since then they've been from the program," said William Seniura, My Personal CU business lending specialist. "We still have loans with them.
"These are not catch-all programs, but they work when it's appropriate," Seniura added. "They don't turn a bad deal into a good deal. They allow us to make a deal that everybody thinks is a good deal or will shortly be a good deal, but is missing one or two components of our credit analysis that is making it hard to get approved. It enhances the loan."
Credit unions maintain they can do even more for small businesses if the cap on their member business loans (MBLs) were lifted. In Congress, separate House (H.R. 688) and Senate (S. 968) MBL bills have been introduced to increase credit unions' MBL cap to 27.5% of total assets from 12.25%. The Credit Union National Association has estimated that lifting the MBL cap would create 140,000 jobs and inject $13 billion in new funds into the economy, at no cost to taxpayers.