NCUA Board Finalized Nonmember Shares Rule, Proposes FOM Rule Implementing Court Decision

The National Credit Union Administration Board finalized its rule expanding credit unions access to nonmember and public unit shares (deposits).

According to the final rule, a federal credit union may accept public unit and nonmember shares in an amount up to 50 percent of the credit union’s net amount of paid-in and unimpaired capital and surplus, less any public unit or nonmember shares, or $3 million, whichever is greater.

The original proposal had eliminated the current alternative limit of $3 million. The Board, however, thought the elimination of the current alternative limit of $3 million would adversely impact some small credit unions.

In addition, the Board is proposing changes to its community charter regulations to align it with the August 2019 opinion issued by the District of Columbia Circuit Court of Appeals.

A federal credit union would be allowed to designate a combined statistical area or an individual contiguous portion of such an area, as a well-defined local community, provided the chosen area has a population of 2.5 million or less.

The Board added a provision to address concerns raised by the Appeals Court about potential discrimination in the field-of-membership selection process in combined statistical areas and core-based statistical areas.

Read the press release.

Proposal Would Allow FCUs to Leverage Nonmember Funding

The National Credit Union Administration has proposed a rule that will allow a federal credit union (FCU) to leverage funding sources other than member shares.

The proposed rule will allow an FCU to receive public unit and nonmember shares up to 50 percent of the credit union's paid-in and unimpaired capital and surplus less any public unit and nonmember shares.

Also, the proposed rule would only require an FCU to develop and maintain a written plan if its public unit and nonmember shares combined with total borrowings exceed 70 percent of paid-in and unimpaired capital and surplus.

According to the transcript from the May 2019 NCUA Board meeting, the proposed rule would potentially allow an FCU to increase its funding from sources other than member shares, from 56 percent of assets to 65 percent of assets.

In other words, this proposal could potentially increase leverage for the entire credit union industry by 6 percent or $135 billion, based on current net worth levels.

Unfortunately, the proposal could erode the cooperative character of the credit union industry.

The hallmark of credit unions is that member savings fund member loans. This proposed rule would permit an FCU to finance a greater percentage of its loans to members with nonmember funds.

Altura Credit Union Provides Emergency Loans to Non-members

Altura Credit Union (Riverside, CA) is providing emergency loans to members and non-members affected by the Holy Fire.

According to the credit union's website, the emergency loan to non-members has:

• an interest rate of 5.99 percent;
• a maturity of 18 months;
• no pre-payment penalty;
• no loan processing fee; and
• no payment for the first 90 days.

But credit unions are only supposed to serve their members.

So, how can this credit union provide loans to non-members?

Nonmembers Getting Better Rates on Deposits than Members

According to Call Report data, 375 credit unions paid higher interest rates to nonmembers on their deposits than to members at the end of the third quarter of 2015.

The analysis examined reported dividend (interest) rates at credit unions. Deposit accounts examined include nonmember accounts, share drafts, share certificates, money market shares, IRA/Keough accounts, regular shares, and all other shares.

The analysis did not look at the number of nonmember deposit accounts or the dollar volume of these deposits.

The analysis found that the dividend rate on nonmember accounts was higher than the reported dividend rate across all types of member accounts at these 375 credit unions.

Coastline Federal Credit Union (Jacksonville, FL) reported the highest interest rate on a nonmember deposit at 6.8 percent. The best dividend rate on a member deposit was 1.09 percent on share certificates.

Numerica Credit Union (Spokane Valley, WA) had the next highest rate on nonmember deposits. The $1.5 billion credit union reported an interest rate of 3.92 percent on nonmember deposits. The best reported rate to members was 1.42 percent on IRA/Keough accounts.

Twenty-eight credit unions with assets in excess of $1 billion reported paying better rates to nonmembers versus members on deposits.

Large credit unions with more than $5 billion in assets that are reporting paying better rates to nonmembers than members include: Navy Federal Credit Union (Vienna, VA), Security Service Federal Credit Union (San Antonio, TX), First Technology Credit Union (Mountain View, CA), and ESL Federal Credit Union (Rochester, NY).

It is dumbfounding that nonmembers are getting better rates on their deposits than credit union members.

In my opinion, paying nonmembers a better rate on their savings than members is clearly a misuse of the credit union tax exemption.

Virginia Credit Union Realty CUSO Launches Division to Serve Nonmembers

A credit union service organization owned by Virginia Credit Union (Richmond, VA), Virginia CU Realty, has launched a new division, Virginia Select Realty, to serve nonmembers.

Read more.

Credit Union Agricultural Lending

This week I am at the National Agricultural Bankers Conference and thought it would be interesting to look at credit unions engaged in agricultural lending.

As of June 2013, there were 297 credit unions reporting at least one agricultural loan on their books. These credit unions reported holding 19,671 farmland and agricultural production loans with a value of almost $2.3 billion.

Credit unions had slightly more than $2.1 billion in agricultural loans that counted as member business loans and $175 million in agricultural loans were to nonmembers.

Approximately $1.3 billion of the loans were farmland loans, while $986 million of the loans are for agricultural production.

During the first six months of 2013, credit unions originated $227 million in farmland loans and $536 million in agricultural production loans.

There were four states, which reported credit union ag lending in excess of $100 million -- North Dakota ($659.5 million), Indiana ($604.9 million), Minnesota ($421.9 million), and Wisconsin ($183.9 million).

The credit union with the most farm loans on its books is privately-insured Beacon Credit Union in Wabash, Indiana. The credit union has almost $446 million in agricultural loans. The next largest credit union ag lender is Central Minnesota Credit Union in Melrose, Minnesota with almost $269 million in farm loans.

There were 46 credit unions that had a material exposure to agricultural lending. Material exposure is defined as having at least $5 million in outstanding agricultural

The table below lists the 10 credit unions with the most agricultural loans.

Loans Going to Nonmembers

In an article in the Las Vegas Review Journal, John Edwards writes about three partners that invested in commercial real estate in Las Vegas and received financing through Ensign FCU, which was later seized by NCUA. The partners defaulted on the loan and NCUA is foreclosing on the property and is suing to enforce the personal guarantees.

The article points out that none of the three partners were members of Ensign and that they were referred to the credit union by a broker. The amount borrowed was $1.4 million.

This raises an important question:

How did these partners qualify to get a $1.4 million loan from Ensign FCU?

Moreover, this is not the first instance of loans going to people who were not credit union members.

NCUA has noted that loans went to people who were nonmembers of Norlarco CU and Huron River Area CU and that both credit unions subsequently failed. Air Force FCU is under a Letter of Understanding and Agreement for serving people who were not qualified for membership.

If this is an emerging pattern of credit unions flaunting their membership requirements, then this is very troubling and requires a closer examination of their preferential tax treatment.