Monday, December 14, 2009

Nonmember Business Loans

The other day, I was speaking with a reporter about legislation introduced by Rep. Kanjorski to raise the aggregate business loan cap of credit unions from 12.25 percent of assets to 25 percent of assets. During the call, I mentioned that nonmember business loans do not count against the aggregate business loan limit.

The reporter was shocked that credit unions were funding business loans to nonmembers, as this seems to contradict the raison d’etre for credit unions as membership organizations.

In October 2003, the National Credit Union Administration (NCUA) liberally modified its member business loan rule to exclude participated or purchased business loans to nonmembers from the aggregate business loan cap.

Beginning in 2004, NCUA started to track purchased business loans and participations to nonmembers.

In March 2004, business loans to nonmembers totaled almost $1.36 billion. By September 2009, federally-insured credit unions reported almost $6.65 billion in business loans to nonmembers. Business loans to nonmembers today represent about 19.3 percent of total business loans by credit unions.

At the end of June 2009, 696 credit unions reported funding nonmember business loans. In fact, some of these credit unions held a significant amount of nonmember business loans. Below is a list of credit unions with the largest amount of nonmember business loans on their books, as of June 30, 2009.

• Patelco CU (CA), $412,989,000;
• Premier America CU (CA), $190,285,000;
• Western FCU (CA), $154,046,000;
• Schoolsfirst (CA), $137,610,000;
• America First FCU (UT), $123,114,000;
• Langley FCU (VA), $113,399,000;
• California Coast CU (CA), $110,977,000;
• Travis CU (CA), $101,782,000;
• Keypoint (CA), $98,312,000; and
• Texans CU (TX), $95,292,000.

I believe a lot of other people would be shocked to recognize the extent to which credit unions are funding business loans to nonmembers.


  1. It almost sounds as if you neglected to tell the reporter that each borrower is a member of the lead lender (credit union). Of course, withholding this information would be disingenuous on your part and, goodness knows, bankers would never stoop to this.

    So let me see if I have this straight. You and the ABA object to this activity despite the fact that 1) it's perfectly legal, and 2) it helps businesses and their local communities? Or is it more likely that you bristle at the size of the balances? I guess it wouldn't be nearly as shocking if it weren't so damn popular.

  2. Wouldn't they be pleased to hear that given the fact that banks seem to be refusing to provide business loans? I am sure all of those loan recipients are thrilled that there are financial institutions out there that are trying to keep the economy afloat.

  3. Dear Anonymous:

    While participations are legal, the point that I am making is business loans, whether to a member or nonmember, should still apply against the cap.

    In fact, from the beginning of 1999 to October 2003, nonmember business loans were subject to the statutory limit.

    It seems that exempting nonmember business loans from the aggregate limit subverts congressional intent. If you read the Senate Report regarding the aggregate cap, it states that "those restrictions are intended to ensure that credit unions continue to fulfill their specified mission of meeting the credit and savings needs of consumers, especially persons of modest means, through an emphasis on consumer rather than business loans."

    NCUA's decision to exclude nonmember business loans allows credit unions to stray further from their mission.

  4. Count nonmember business loans and raise the cap to 25%. Fair trade?

  5. If a credit union's mission is to help its members achieve financial success I don't see how investing in participation loans strays from the mission. As long as the credit union understands the risks involved it is the same as any other type of investment that brings a financial return to the members. In fact, I would argue that it is philosophically better to buy non-member business loans since these loans help members of other credit unions.

  6. Their mission as you and the ABA see it, am I right Mr. Leggett? I've been in the credit union business for more than 35 years and I'm unaware of a "mission statement" appearing within the Federal Credit Union Act. Perhaps you can show me what I've overlooked.

  7. I'm sure there was a Senate report also in the late 1970s when the ABA sued the National Credit Union Administration to prevent credit unions from offering share draft (checking) accounts to their members. As I recall, the ABA didn't think this was the mission of credit unions either.

    To their chagrin, the ABA doesn't get to decide what the mission of credit unions is. That's up to the government and, last time I checked, the National Credit Union Administration was the duly authorized agency for interpreting Congressional intent and making rules for the industry. The fact that Mr. Leggett and the ABA don't like it is a) not surprising, and b) unimportant.

    I have been in the credit union business for more than 37 years and the advantage I have over my younger colleagues is that I have watched guys like Mr. Leggett come and go many, many times during this period. Like him, they have had little or no meaningful impact on our industry. Credit unions continue to innovate and grow, more so now than ever before. They are hugely popular with their members and with elected leaders of all stripes. Try as they might, our adversaries never move the needle.

    If I were Mr. Leggett--and I thank God I am not--I would put my energy into fixing my own industry's rather shabby reputation, rather than wasting it on another ill-fated attempt to undermine credit unions. The blog is a modern idea, but his is not all that interesting or clever.

  8. What's up with all the anonymous comments? Is no one willing to use their real name while defending the credit union movement?

  9. I'm with you Jeffry, people should be willing to stand by their name, opinions, and comments.

    @Keith - Your statement to the reporter is a little misleading, insofar as the "non-members" are members of the originating institution. By selecting large CU's, their participation numbers will obviously be large, but it effectively gets your alarmist point across. I'd bet you a beer that their %'s are inline with the industry.

    I could also see the argument that participation could be viewed as investments, especially if the CU isn't servicing the loan. How is a business participation loan different than an MBS for the non-originating participants?

    Simpliscally, CU's were started because people couldn't get credit from the traditional banks. If banks aren't will to lend to small business, how is that not inline with their intended purpose?

    Thanks for bringing another voice from the banking (both banks and CU's) industry and I look forward to your response.

  10. Robbie:

    You stated that you could make the case that the purchase of a nonmember business loan could be viewed as an investment. In 2003, that was part of NCUA's reasoning as to why to exclude nonmember business loans from the aggregate business loan cap. NCUA in its proposed rule wrote: "A credit union that purchases participation interests in loans from other originating lenders does so as a means of investing its excess funds and bases its participation decision on normal investment considerations, including safety and return."

    ABA did not agree with this opinion. Also, the U.S. Treasury Department expressed concerns about
    treatment of participation interests. Treasury in a comment letter to NCUA believed that this would undermine the intent of Congress with respect to limitations on credit union
    business lending.

    When NCUA issued its final rule, it sort of split the baby requiring participations bought that were to a member of the credit union count against the aggregate business loan limit, but excluded participations in nonmember business loans from the aggregate limit.

    As to the other question of whether the participations of the ten credit unions listed differ from the industry norm, I will need do some research and will post the results in the New Year.



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