With the federal government straining to get business loans flowing, credit unions might feel like the kid picked last for the football team. They’ve fought for years to get looser restrictions on commercial lending, and now, when the country apparently needs such loans most, they’re still sitting on the bench.

Credit unions’ fight to increase business lending isn’t a new one, but the current economic environment has heightened the stakes. Many credit unions feel they’re being denied an excellent business opportunity that would also help the economy – but doubters say opening up commercial lending, especially in these fraught times, would harm many credit unions themselves.

Stunted Growth

As it stands, credit unions are only allowed to put 12.25 percent of their assets toward business loans. Past legislation has proposed that cap rise to 20 percent, and this year Sen. Charles Schumer of New York has vowed to revive the legislation.

Although most credit unions aren’t yet near the 12.25 percent ceiling, Robert M. Cashman, president and CEO of Metro Credit Union, says the low ceiling is worrisome for credit unions that are seeing steady growth in the area – especially now, as borrowers are turning to credit unions after large banks have tightened up lending.

“We’ve picked up an awful lot of new business, especially in the last six months,” he said. “Ultimately, this may become an issue.”

But some Massachusetts credit unions may have to address their restraints a lot more quickly: Pittsfield’s Greylock Federal, for example, had put 9.73 percent of its assets toward business loans as of the end of 2008, and was creeping up toward the 10-percent mark by the end of the first quarter, said John Rys, chief financial officer for Greylock.

Remove The Reins?

Given the national effort to pump out more loans, said Frederick Healey of Workers’ Credit Union, it seems silly to keep the cap at all. The 12.25-percent limit was an arbitrary number when it was imposed a decade ago, and it makes no sense to keep.

“Wouldn’t it make sense to free the reins on part of the industry that is quite capable of making loans?” he said.

But Thomas Pinkowish, president of the Conn-based consultancy REMOC Associates, has some serious reservations about credit unions leaping into the fray.

“If regulators allow credit unions to do this stuff, that doesn’t mean they should do it,” he said.

Pinkowish’s concerns stem from credit unions’ lack of experience with commercial lending. Business loans are much riskier than home or auto loans, and credit unions that begin writing member business loans with no strategic planning can get hurt down the road.

Also, a headlong jump into commercial lending can dilute these institutions’ core mission: as credit unions, they have strong customer loyalty and low delinquency rates because they keep such close-knit ties to their members, he said. Expanding into new turf and becoming more like banks will – and already has, in many cases – give them the same types of problems banks are struggling with now, such as high loan delinquency rates.

He pointed to the National Credit Union Association’s member business loan delinquency rates for federal credit unions: from 2006 to 2007, delinquencies rose 120 percent. The year after, they rose another 155 percent.

Those figures were on the rise even before the economy went into its full-blown tailspin, he said.

Cashman acknowledged that some credit unions delved into riskier commercial loans in the past few years, but he said a few large-scale bad loans across the country shouldn’t paint all credit unions with a bad brush: Drill down to more localized geographies like New England, and the loans will likely look much better.

Risk? What Risk?

Rob Kimmett, spokesman with the Massachusetts Credit Union League, said he doubted that credit unions would be embarking on risky loans, especially with the entire nation having just learned a few hard lessons in fiscal conservatism. Besides, credit unions in the state have a solid track record for the business loans they’ve already made.

But Jack Brick, a Michigan-based consultant, concurred that credit unions can fall into making commercial loans in an “ad hoc” fashion. Credit unions try to write them the same way as personal loans, and that creates trouble down the line.

What’s more, the potential for delinquencies are greater during economic downturns like this one.

“Whether credit unions are prepared to elevate that kind of lending in this kind of environment, that’s an open question at this point,” he said.

Another option for smaller credit unions to dig into commercial lending is to pool their resources in the form of credit union services organizations, or CUSOs.

Under this system, they can essentially outsource lending work but profit from the loans, Brick said. That sounds great, he said, but credit unions still have to have some expertise with the subject – when regulators take the loan portfolio apart, credit unions have to answer for any problems that come up.

“Just because they’ve outsourced it, doesn’t mean they’re off the hook on this thing,” he said.