Credit Union ILCs for Card Buys Never Got Off the Ground
WASHINGTON -- This year may be remembered as the year that two groups of credit unions, CUSOs, associations and vendors got together to try to launch industrial loan corporations which, it was hoped, would purchase card portfolios and give CUs a way to participate in the credit card industry other than by issuing cards themselves.
In the end both efforts failed, though each left heirs that pledged to continue the effort until credit unions had other credit union-owned options for selling their card portfolios.
Each effort got underway with the notion of using an industrial loan corporation, or ILC, as a vehicle for the card purchases. These charters are something of a holdover from the past, nonbank corporations that are nonetheless able to perform some banking functions, such as making consumer loans. Currently there is no federal ILC charter, though different states, most notably Utah, have state ILC charters.
The first group of investors included Corporate One, CUNA Mutual Group, Card Services for Credit Unions and the card processor Fidelity Information Services (then Certegy). Their plan was to charter an ILC, Union Financial Services Corporation in Utah, and then to turn the ILC into essentially a monoline card-issuing bank for CUs. Those CUs that wanted a credit union-owned card issuer to sell their card portfolios would have one and CUs that were looking to start a card program without the risk could do so through an agent relationship with Union Financial.
Further, CUNA Mutual would provide a vehicle through which credit unions would be able to invest in securities that would have been backed by the firm's card receivables as well.
The second group of investors consisted of the $3 billion Wescom Credit Union and PSCU Financial Services. Their plan was to buy an already existing ILC which, in turn, owned a $500 million bank called Silvergate and use that to provide the same sort of choice that Union Financial sought to provide, another credit union-owned option for purchasing CU card portfolios.
Currently only TNB Card Services, the card-servicing arm of credit union-owned Town North Bank is the only credit union-owned option for buying CU card portfolios.
But in the end, both efforts failed, foundering on the rocks of regulatory and political uncertainty about ILCs and their roles and powers. Analysts said the two efforts had the bad luck of working on ILCs at the same time as major retailers, such as Wal-Mart, were putting in applications to buy or charter ILCs. The prospect of a less-regulated financial institution offering perhaps cheaper loans in every Wal-Mart store across the country drew opposition from bankers and some credit unions. When some lawmakers also raised concerns, regulators quickly backed away from the charter.
However, all is not lost. Union Financial is currently looking for backing from investment bankers to continue its attempt using a more standard sort of banking charter and Wescom has asked for and received a charter that will allow it to purchase other CUs' card portfolios. If either or both of these efforts succeed, 2007 will see CUs that are looking to sell their card portfolios with a couple more ways in which they can do it. --firstname.lastname@example.org