MADISON, Wis. -- Even though their credit union supporters maintained it was a good idea until the end, the notion of buying or chartering an industrial loan corporation to purchase credit union credit card portfolios proved to be just too controversial. Last week, both the $3.4 billion Wescom Credit Union and CUNA Mutual Group pulled out of their respective efforts to buy or charter ILCs.
Wescom and Silvergate Capital had announced a deal whereby Wescom would have purchased Silvergate's ILC and used it to buy credit union credit card portfolios which it would have managed in partnership with PSCU Financial Services, the largest card services CUSO in the country.
CUNA Mutual had been involved in an effort, along with Card Services for Credit Unions, the association of credit unions that process their card transactions with Certegy, and Corporate One to try to charter a new ILC. The new entity, Union Financial Services, would be based in Utah and would also serve to purchase and manage credit union credit card portfolios.
Wescom and Silvergate's decision effectively ends the effort to have Wescom buy an ILC. Sources with Union Financial, however, said its effort would continue.
Although Wescom and CUNA Mutual both gave different immediate reasons for moving away from ILCs, the overall situation with the controversial ILC charter played a role in each of their long-term decisions.
For Wescom, the ongoing questions from state and federal regulators, in addition to Congress, about what ILCs would be able to do and how much they should be regulated meant that neither organization could see a point where their application would finally succeed, according to Darren Williams, CEO of Wescom.
"The situation we were facing was one where we couldn't look down to any one point, six months, 12 months, 18 months down the road where we could know our application would be approved," Williams said, adding, "we're disappointed this acquisition didn't move forward as planned and continue to have great respect for the Silvergate organization and management team."
The situation had been further complicated by Wescom's needing approval from both California and federal regulators and by the FDIC saying that it would not begin to work on the application seriously until California signed off on it. "It got to be where there were just too many issues around this," Williams said.
CUNA Mutual wouldn't comment on the role the ILC controversy might have played in its decision, but the long delay guaranteed that the details of the deal were not finalized by the time the insurer's ongoing review of its operations came around.
"We continue to support the concept for Union Financial Services, but felt our participation was inconsistent with the current focus CUNA Mutual is placing on participating in activities that relate to core business objectives," explained CUNA Mutual spokesman Phil Tschudy. "Instead, we are focusing our resources, both people and dollars, on repositioning our company through optimization of the company's operations, investments, corporate governance, and distribution system, what CEO Jeff Post has referred to as the company's 'ante.'"
Williams said that no one had come to the CU from the FDIC and advised them to withdraw their application, but the CU felt validated in its decision when, the next day, the FDIC put a moratorium into place on new ILC applications for federal insurance.
The FDIC put the moratorium in place to provide time to assess developments in the ILC industry, to determine if any emerging safety and soundness or policy issues exist involving ILCs, and to evaluate whether statutory, regulatory or policy changes need to be made in the oversight of these charters, the bank insurer said.
"The moratorium also allows the agency time to further evaluate the various issues, facts and arguments raised in connection with the ILC industry," the FDIC said.
Where the overall idea of having another credit union-owned option for buying CU card portfolios goes from here remains unclear. Williams said Wescom received a great deal of positive feedback about the idea when it was announced and that the CU remained committed to it. But he also admitted the CU had no definite plan in place for how to proceed.
"I guess the first step of our plan B is to start formulating a plan B," Williams said, adding that Wescom had known it would be breaking new ground with the ILC purchase idea, but that it had not foreseen the regulatory and political firestorm that ILCs in general would face or how that might effect its application.
But Union Financial Services says it will continue. A source with the new firm declined to speak for the record, but said Union Financial has restructured its ownership in ways that address regulatory concerns and will press forward. The source also insisted that Union Financial is also not affected by the FDIC moratorium, though a spokesman for the FDIC would not verify this.
The Union Financial effort got underway months ago, the source explained. The source declined to identify what alternative governance structures the firm would use.