One Congressman's Solution for Boosting Small Business Loans

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The first Friday of every month brings the all-important employment report. February's numbers were better than anticipated. The United States lost only 36,000 jobs, versus the 68,000 that experts expected. This compares with 651,000 jobs lost in February 2009. Still, the unemployment rate held steady at 9.7%, with the unofficial rate stuck around a whopping 16%.

With large companies across industries from Caterpillar (NYSE: CAT  ) to Home Depot (NYSE: HD  ) to Sprint Nextel (NYSE: S  ) having cut thousands of jobs, it's no wonder. However,small businesses lie at the core of our national job deficit; employing just more than half of private-sector U.S. workers, they are the nation's job engine. As banks large and small, from Citigroup (NYSE: C  ) to Provident Community Bancshares (Nasdaq: PCBS  ) , become more prudent, it's gotten much more difficult for small businesses to obtain the loans they once used to expand their businesses and create jobs.

Rep. Paul Kanjorski (D., Penn.) has offered one solution to this problem: lifting the cap on credit unions' loans to small businesses, allowing them to extend more loans to help the economy grow. When I spoke with Rep. Kanjorski about his proposal, he told me that credit unions lent wisely before the crisis, and are lending more now. Credit union business lending grew by more than 11% in 2009. Now credit unions are facing a statutory cap on lending. To fill a void in business lending, Rep.Kanjorski says credit unions need Congress' help. 

Here is an edited transcript of our conversation:

Jennifer Schonberger: Job creation is obviously an issue now. Part of the problem we're seeing is that small businesses are unable to get the credit they need to expand their businesses. I understand you have proposed lifting the statutory cap on credit union lending to businesses in an effort to stimulate job creation. Can you tell me about that?

Rep. Paul Kanjorski: In the process of creating a bill, which saved credit unions and [their ability] to have members, a concession was made in limiting the capacity of credit unions to make commercial loans. Prior to that, there was no limitation. That act put a 12.5% of assets limitation on credit unions making commercial loans.

That has remained in place since then over these last 12 years, and now I think they're up around 11% of their assets on business loans. So they're highly restricted from participating in helping commercial entities borrow money to create jobs. I've always felt we had no limit before, so it would be reasonable to at least double the limit now to allow credit unions, to provide some of the financing that's necessary to create jobs and encourage businesses to expand.

I've prepared a bill and submitted it. It now has 90 co-sponsors. We have letters to leadership in both the House and Senate, asking to move this bill along and to include it in the next jobs bill. I understand there's a good chance that may happen. That will enable us to put $10 billion into the lending system and create about 108,000 jobs at no cost to the government or taxpayers.

So it's a way of stimulating business without us getting involved in bailouts and providing the money -- especially in this spring season, when we're about to grow. It seems eminently clear to me that would be the right thing to do: allow these credit unions to participate in the recovery program of the American economy.

Schonberger: What about the Small Business Administration? Hasn't their role in the past been to offer small businesses credit lines?

Kanjorski: Well, they do. They offer guarantees to a large extent. There's some direct lending, but it's very small. But banks are recalcitrant to entertain what would otherwise be considered fairly good loans and fairly good business. I guess you have to say they're a little gun shy. As a result, you've got a credit crunch out there, and it continues.

... If [banks] are not disposed to make a loan, they probably won't make it anymore, even if there's a guarantee behind it. I've watched that very closely in the SBA and in the rural development package in the loan guarantees. So what I think we're doing here is adding on an entirely new area of exposure to get these loans out there. If we can get credit unions to fill that void, it's going to be very helpful and very productive for the American economy.

Schonberger: Are there risks to removing the lending cap on credit unions?

Kanjorski: Not really. The credit unions represent about 6% of the assets of financial institutions, compared with 94% for banks. So they're really minuscule. They really enable the community activity. They're character loans [otherwise known as signature loans]. ... They're really loans based on the character of the individual investment, or loan. The success rate of recovery of such loans is extremely high -- in the 99th percentile. So I don't think we're putting the country at risk in any way since it's all credit union money, and since they're so successful in getting their money back.

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Fool contributor Jennifer Schonberger owns shares of Home Depot, but does not own any of the other companies mentioned in this article. You can follow her on Twitter. The Home Depot and Sprint Nextel are Motley Fool Inside Value selections. The Motley Fool has a disclosure policy.

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