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Senator Proposes Fixing Little-Known 1998 Law By Eliminating the Statutory Cap On Small Business Loans Made By Credit Unions

Right Now, Credit Unions Can Only Lend Up to 12.25% of Total Assets to Small Businesses; Credit Unions Say $10B Worth Of Loans Could Be Made If Cap Is Lifted

With Big Banks Pulling Credit Lines To Small Businesses Amid Economic Crisis, Schumer Says Credit Unions Are Well-Positioned To Come To The Rescue

With the ongoing economic crisis choking off the flow of credit to U.S. small businesses, U.S. Senator Charles E. Schumer (D-NY) announced a new proposal today that would tap credit unions to jumpstart lending to these businesses by $10 billion in the coming year.
Schumer said he plans to introduce legislation that would eliminate a statutory limit on the volume of business loans that can be made by the country’s 8,000 credit unions. Under a 1998 law, credit unions can lend to small businesses at just 12.25 percent of their total assets. Prior to the 1998 bill, no cap on small business lending existed; Schumer’s bill would eliminate the cap in its entirety once again.
The Credit Union National Association (CUNA) estimates that credit unions can loan $10 billion to small businesses in the first year after cap is lifted. 
“Our focus must be on increasing the lending to small businesses, which are the lifeblood of our economy. They have not only been a casualty of the ongoing credit crisis, but have unduly felt its impact.” Schumer said. “The situation facing these businesses right now is much worse than a matter of them simply being denied new loans. They are being strangled by having existing lines of credit pulled. A threat like this to small businesses could upend the livelihood of millions of workers and be catastrophic for the larger economy."
According to data provided by the Small Business Committee, the volume of loans guaranteed by the Small Business Administration is down more than 60 percent compared to this time last year. In the current environment, it is not only hard for small businesses to obtain initial credit, but it is also proving very difficult to maintain lines of credit they already have. Many businesses are now relying heavily on credit cards, which often have unfavorable terms. According to a January 2009 survey by the National Small Business Association, 70 percent of small business owners say they have seen the terms of the credit cards worsen.
With so many large banks in bad shape, credit unions are becoming increasingly important, especially with regard to small businesses that need relatively small lines of credit. lending institutions in the markets. Due in large part to the fact that they are not-for-profit, membership-based institutions, credit unions have not been exposed to the same losses that major banks have seen in their lending and investment operations.
Credit unions also have a long track record of scrutinizing borrowers, and low delinquencies as a result. Because deposits have been on the rise as people move their savings from the stock market to savings accounts, they have cash on hand to loan to small businesses.
There are over 8,000 credit unions in the U.S.  With online banking, credit unions are available to just about any small business anywhere. And with an average loan size of about $200,000, credit unions are suited to small business lending. An estimated 27 percent of credit unions currently make small business loans.
The regulator for these institutions already has a policy in place that gives them the ability to provide oversight over their lending mix. Schumer’s bill will also require a semi-annual report to be provided to Congress twice a year on small business lending and loan delinquencies so that Congress can monitor the impact of the cap elimination. 
This is just the latest relief measure pushed by Schumer. In November, the SBA heeded a call by Schumer and Sen. John Kerry to allow approved lenders to use a variable interest rate instead of the prime rate, and allow securities to be formed from SBA-backed loans of varying rates. Then, in the economic recovery package passed last month, Schumer and Kerry successfully fought to include $375 million to go towards eliminating onerous fees attached to SBA loans and $30 million for the SBA’s microloan program.


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