Colorado credit unions are hoping that the U.S. Senate will vote this week on a proposal to lift caps on small business loans, which would free up as much as $260 million.

Sen. Mark Udall (D-Colo.) is calling for Congress to raise the lending cap for credit unions from 12.25 percent to 27.5 percent.

He introduced the Small Business Lending Enhancement Act March 22. Senate majority leader Harry Reid promised a vote on the bill, which is now on the Senate’s calendar of general orders and could be voted on anytime.

Credit unions across the country are projecting that if approved, the bill could create 100,000 jobs in the first year and provide $10 to $12 billion in additional loans to small businesses.

Udall, who spoke last month on the Senate floor about this bill, said a change in this federal statute would help free up capital for Main Street business owners, those seeking loans from $50,000 to $200,000. In some cases, big banks are not interested in making these small loans, he said.

“What this legislation would do is deregulate an industry that’s really raring to go to help small businesses,” he said in his remarks. “The reason this is so important is that there continues to be a phenomenon in our country where small businesses are starving for credit but the federal government is standing in the way of them procuring that credit.”

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In Colorado there are 99 credit unions with about $15.8 billion in assets. The average credit union business loan is $219,000. It’s capital being used for local business expansions and to keep them competitive during a time when banks are reducing credit availability, said Scott Earl, president and CEO of Mountain West Credit Union Association (formerly Credit Union Association of Colorado.)

Since the early 1900s, when credit unions were created, they have made loans to small businesses. In 1998, new legislation capped what credit unions could do in small business lending. Earl calls that cap arbitrary. Now, some credit unions are approaching that cap and that means they will start turning small businesses away, he said.

“Right now, when small business is struggling and finding it tough to find credit, we could step in and make a difference,” he said.

A similar proposal last year crashed and burned. It seems that traditional banks don’t favor the measure. Credit unions are nonprofit institutions that do not pay federal income tax. Banks do pay. Some banks have argued that the bill creates an unfair advantage for the credit unions.

“There is this divide between banks and credit unions,” Earl said. “They’ve made this a bank-credit union issue. But it’s about small business.”

AmeriCU Credit Union, a New York-based credit union, reported this month that credit unions across the country increased overall business lending by 4 percent in 12 months ending June 2011 and put $12.6 billion in lending to 300,000 small businesses – a 71 percent increase over 2010.

Some credit unions have avoided small business lending because of the 12 percent cap, Earl said. It was not a big enough part of their lending portfolio to hire experts in small business lending. But, with a higher cap, credit unions that had been reluctant to get into small business lending may embrace it.

“That is where we could see the biggest change happening,” Earl said. “Most (credit unions) would find it appealing — if it fits into their business plan, they would think about this.”

Earl feels good about the bill’s chances this year. News organizations across the country have reported that small businesses have had trouble with access to capital, he said. And, that has caught the attention of lawmakers and small business organizations across the country.

The Small Business Lending Enhancement Act has been endorsed by a coalition of small business organizations including the National Association of Realtors, the U.S. Women’s Chamber of Commerce, the American Small Business Chamber and National Association for Self Employed.

“I truly believe that small business—the entrepreneurs need this kind of support and this kind of help,” he said.