After years of lobbying efforts and public testimony in Congress, the National Association of Federally-Insured Credit Unions (NAFCU) announced it has signed a Memorandum of Understanding (MOU) with the Small Business Administration (SBA). This will effectively increase credit unions’ access to SBA-backed funding for small businesses. The MOU will open the door for more credit unions to offer SBA 7(a), 504, and Community Advantage loans without some of the prior limitations placed on them by regulations. Credit unions may now fully participate in SBA loan guarantees which reduce their risk and make more capital available for its small business members.
Arbitrary Lending Cap Removed
Credit unions could offer SBA-backed loans prior to the MOU, but the loan amounts were capped by regulation at 1.75 times the business’s net worth. This deal removes that arbitrary cap and paves the way for credit unions to participate more broadly in the huge market for SBA loans. This will be especially beneficial for small businesses that are generally ignored by traditional banks because of the small loan amounts they need.
Credit unions are not-for-profit, member-owned cooperatives that target local businesses for membership, offering more personalized services and a willingness to write smaller loans. According to the NAFCU, 85 percent of credit union loans to their member small businesses are for less than $1 million as compared to just 27 percent of bank loans.
Credit Unions Are Better for Small Businesses
In a letter to President Trump earlier this year, Dan Berger, President and CEO of NAFCU, wrote eloquently about the important role credit unions have played in supporting small businesses. He pointed to the fact that during the height of the financial crisis, credit unions continued to lend to small businesses even as the banks shut them out. As bank lending to small businesses decreased in the years following the crisis, credit unions increased their small business lending to where it stands today at $60 billion. If not for the arbitrary lending cap for small business, that figure would be substantially more.
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More Needs to Be Done to Level the Playing Field
After all that, the regulatory environment is still tilted drastically towards banks. Following the implementation of regulations under Dodd-Frank in 2010, the credit union industry lost 20 percent of its base, shrinking it to the 5,844 credit unions that exist today. Small businesses rely on the low-cost financial services that credit unions offer along with their exceptional service. The MOU gives small businesses greater access to capital that was otherwise unavailable to them. However, it is only one step closer to leveling the playing field for credit unions.
The NAFCU is already off and running with the new rule by setting a target of recruiting 250 more credit unions to the expanded SBA loan program by the end of the year.