Credit unions expand their
business with business loans
By Vikki Ramsey Conwell • Bankrate.com

When the dust from the intense battle over the Credit Union Membership Access Act settled, credit unions had gained the ability to serve multiple groups of people -- whether related through an employer, a community or civic group, or an association.

But with that flexibility came a restriction. The act, HR 1151, set a commercial lending cap for credit unions of 12.25 percent of their assets.

Credit unions have countered by banding together to set up more Credit Union Service Organizations, independent corporations chartered by the states that govern them.

"There has been a significant increase in the formation of CUSOs over the past two years, and this increase coincides with HR 1151," says Bob Dorsa, president of the National Association of Credit Union Service Organizations. "As credit unions became concerned about losing their membership, they were forced to consider options for servicing non-members and alienated members."

Business loans from credit unions
Seventy-five percent of the service organizations provide financial services: insurance and investments. Only a few offer small business or commercial loans. Those who borrow from a service organization may not have to be a member of one of its affiliated credit unions, but half of the organization's income must be generated from members.

Member credit unions can make loans through the service organization, or in-house. If a credit union begins to approach its internal lending cap, it can still initiate loans through a service organization or sell some of its existing loans to the service organization to reduce its own loan levels. This expands the small business owner's access to commercial loans and credit union membership.

More than 210 CUSOs were formed during the 1990s, up from 155 in the 1980s and 13 in the 1970s, according to Callahan and Associates, a credit union consulting firm based in Washington.

Credit Union Service Organizations are not a new concept. There are about 800 in the United States, owned by 2,000 credit unions. But development has been accelerating, and that growth is expected to continue in response to changes in the law affecting credit union practices, and demand from consumers.

Banking analysts warn against rapid growth among credit unions, but Dorsa says he expects the ratio of credit unions to Credit Union Service Organizations to remain about 10 to 1, and there will never be thousands of them.

"With the restrictions of HR 1151, there had to be some methodology in place for credit unions to work together and facilitate help to their members," says Evan Bane, spokesman with the Wisconsin Credit Union League, a trade association of state credit unions. "CUSOs are one way to do that. And who's to determine that credit unions have to be small or have a certain dollar limit in assets?"

Banks fight back
But bankers attempted to do just that. An early crescendo came early in 1998, when the Supreme Court ruled 5-4 against credit unions, saying they could not admit individuals are members unless they were affiliated with a group included in the credit unions' original charters.

Bankers wanted to see federal credit unions taxed and forced to comply with the Community Reinvestment Act if they expanded beyond a certain size. The bankers said that the "conglomerate" credit unions had an unfair and illegal competitive advantage. More than 77 million Americans are members of the nation's 11,300 credit unions.

Congress neutralized the Supreme Court's ruling when it passed HR 1151 in April. The American Bankers Association has vowed to file suit in response.

"It is coincidental that the new changes in the law have allowed credit unions to invest in member business loans," says Ken Eiden, chief executive officer of Banta Community Credit Union, one of three Wisconsin credit unions that recently formed a Credit Union Service Organization specifically designed for commercial lending.

Opening for business
In July, the Business Lending Group will open its doors and begin issuing small business loans to members of its founding credit unions: Banta Community Credit Union, Citizens First Credit Union and Fox Communities Credit Union. The three have assets of $400 million and a combined membership of more than 75,000. The group has opted not to make loans to nonmembers.

"Our combined financial strength gives us more capacity to do larger deals," says Greg Hilbert, president of Fox Communities Credit Union. "Collectively, we can offer a better product and service than we could individually."

The idea for the Business Lending Group was developed about three years ago, with seven credit unions originally involved in the talks. Four credit unions dropped out, and the remaining three came together last year to finalize the plans. They each invested $75,000 capital and committed to funding loans up to $7 million for the credit unions' current members.

"Small business owners want the same level of service from credit unions that they were used to receiving on the consumer side," says Eiden. "When the conglomerate banks are not able to meet their needs, the local businessman turns to us. We are simply responding to the demands of the small business community."

Consumers inevitably will play the largest role in the growth of credit unions and the expansion of their services. Since people are no longer relying upon certificates of deposit and savings accounts as their primary investments, deposits are no longer flowing into financial institutions as they were, says Dorsa. Since 1990, the growth of all deposits at financial institutions has remained flat, while mutual funds have grown threefold.

Like banks and thrifts, credit unions will have to enhance their products and services for current members and as an enticement to attract new members.

Vikki Ramsey Conwell is a freelance writer based in Georgia

-- Posted: June 28, 1999