Commercial Loans: The battle between credit unions and banks heats up

A new front has opened in the long-standing war between banks and credit unions: commercial lending.

An improving economy and booming demand for financing by businesses has attracted credit unions nationwide into commercial lending, a sector where banks have long dominated.

Traverse City credit unions led the state last year in the percentage growth of commercial loans.

They generated $31,420,442 in business loans last year, a 159 percent increase from $12,128,844 in 2014, according to the Michigan Credit Union League.

Statewide, business loans grew by 17.3 percent from the end of 2014 to the end of 2015, the fastest-growing credit union loan category, the MCUL said.

“It is certainly part of our strategic plan,” said David Leusink, president and CEO of 4Front Credit Union in Traverse City. “We’ve gone from zero to nearly 8 percent of our portfolio being in business loans in the past three years.”

4Front has $22 million in outstanding commercial loans, 7.6 percent of total loans of $290 million. 4Front was formed in 2014 by the merger of Traverse City-based Members Credit Union and Charlevoix-based Bay Winds Federal Credit Union.

Leusink said he has recently hired several “recovering bankers” from local banks to build 4Front’s commercial lending business. He and other credit union executives also say they see a growing need by their members for business loans. A survey by 4Front, for example, revealed that nearly 13 percent of its members owned businesses.

“There’s a greater awareness that credit unions are able to help, especially with small businesses that banks aren’t interesting in serving,” said Karen Browne, president and CEO of TBA Credit Union.

Many large banks nearly stopped commercial lending in the state during the Great Recession and now find themselves in a fight with credit unions to rebuild that business.

TBA has a commercial loan portfolio of $10 million, 11.4 percent of total loans, Browne said. Credit unions are limited to lending no more than 12.25 percent of their assets to business borrowers, a federal regulatory cap they are lobbying to raise or eliminate.

The bulk of commercial lending by area credit unions is in real estate, which is recovering value lost in the Great Recession. But credit unions say they want to expand commercial lending in other areas, such as equipment and vehicle fleets.

Bankers say allowing credit unions to boost commercial lending is another example of “mission creep” by credit unions, which have traditionally focused on offering consumer and mortgage loans to individuals.

“Credit unions are smelling more and more like a bank every day,” said Mike Worden, president and CEO of Honor Bank, which concentrates on commercial loans and mortgages.

Bankers have long complained that credit unions have an unfair advantage over banks because their nonprofit status allows them to offer lower interest rates on loans.

“Our position is that if all things were equal, and credit unions were taxed the same way we are, we could go head to head with them on all products and services,” said Patricia Herndon, advocacy director at the Michigan Bankers Association in Lansing.

The bankers also say many credit unions aren’t suited to doing commercial lending, which is more complex than consumer lending. They same some credit unions are risking members’ money by making loans with looser terms than commercial banks would find acceptable.

“Some of the terms I’ve seen (in credit union commercial loans) aren’t terms I would call prudent,” said Worden. “They’re not terms we would be comfortable with.”

Banks also claim that credit unions aren’t as tightly regulated as banks. That, combined with the credit unions’ foray into commercial lending, could lead to widespread credit union failures in a deep economic recession.

“I would laugh at that,” said TBA’s Browne. “We have a highly trained staff. That’s kind of a joke, I think.”

And in a veiled reference to the federal bailout of big banks during the 2008 financial crisis, 4Front’s Leusink noted that taxpayers have “never paid for a loss or a bailout” of a credit union.

Credit union executives say they spread out lending risk by participating in larger loans with credit union service organizations. CUSOs, which are owned by credit unions, underwrite and manage loans on behalf of member credit unions.

Leusink said CUSOs allow local credit unions to fund large loans for local businesses and diversify their portfolios with loans beyond their backyards.

4Front is participating with dozens of other credit unions in a variety of developments, including the Hotel Indigo in Traverse City and rental student housing in East Lansing through the Michigan Business Connection CUSO in Ann Arbor.

The Michigan Business Connection manages a portfolio of more than $400 million in business loans on behalf of its 25 member credit unions.

“It’s an interesting way to make capital available to a growing business while not overextending ourselves,” Leusink said.

East Traverse Catholic Federal Credit Union has been doing small-business lending for about two-and-half years, but has boosted that segment since last fall after opening its membership to all individuals and businesses in Antrim, Benzie, Charlevoix, Grand Traverse, Kalkaska and Leelanau counties.

Nick Schmitter, East Catholic’s lending manager, said his credit union wants to help local businesses grow, which in turn can produce more jobs and aid in economic growth of the communities it serves.

“We strive to have smaller fees and better service than banks,” he said. “Commercial banks don’t mind offering subpar customer service because of their size. They bullied people around, but that can’t do that anymore.”

The battle between credit unions and banks is becoming more heated, but the ultimate winner is likely to be the consumer of financial services.