Russell is the CEO of TMG Financial Services, the credit card portfolio purchasing arm of The Members Group, a card processing CUSO loosely affiliated with the Iowa Credit Union League. TMGFS is offering credit unions the second of its Collateralized Advance Plan offerings, mechanisms through which credit unions can invest in the CUSO's roughly $32 million portfolio of credit union-issued credit card loans.
"We think the current economic conditions strongly favor investing in a loan program which can offer competitive yields from a very soundly underwritten investment," explained Russell. "If anything, these days make having a higher yield even more important for credit unions."
The program will allow credit unions to invest credit card loans, permitting TMGFS take the credit and fraud risk on those loans, and it pays 4.25% over two years plus interest semiannually, Russell explained.
"In addition we have a comprehensive reporting structure that is designed to keep our CU investors entirely up to date and aware of what we are doing and why," he added.
TMGFS has purchased the card portfolios of 20 credit unions and entered into agent issuing
agreements to issue roughly 21,000 cards worth roughly $32 million in receivables as of the end of March, Russell said.
But with the all the news about collateralized debt obligations losing their values and winding up on lists of so-called toxic assets, is now really time to make loans whose returns are rooted in credit card receivables? Russell thinks it is. "Not all credit card loans are equal or alike," Russell contended. "There are a lot of things about CU card loans that are better than the card loans banks make."
Credit union card loans have often brought premiums in the market place because they have been perceived as being of higher credit quality, TMGFS noted. Historically, the charge-off rate for credit union-issued cards has lagged behind bank-issued cards by hundreds of basis points. Roughly 278 basis points separated the credit card charge-off rates of credit unions in September 2008 (2.47%) and the top 100 card-issuing banks (roughly 5.25%), according to TMGFS.
"Even as card charge-off rates seem poised to rise generally in 2009," Russell said, "we estimate our portfolio will end the year with a charge-off rate of no more than 3.5%." Karin Brown, vice president of collections for Lending Solutions, found this a reasonable figure. While she stressed that she was not endorsing any CUSO investment, Brown said she expected overall CU card loan charge-offs to come in around 3% by the end of the year.
Additionally, TMGFS pointed out that, on the whole, the credit lines on their cards are significantly more modest than those of competing bank-issued cards, further limiting the CUSO's exposure and the risk of card-holder default. According to the CUSO, almost 47% of its cards have credit lines of between $5,001 and $10,000. By comparison, over 42% of Bank of America's card lines are over $25,000, along with 33% of Chase's card lines and almost 52% at American Express.
TMGFS also pointed out that most of the credit unions it has agent issuing agreements with are located in states and geographic regions considered more "economically stable."
This is the second CAP offering that TMGFS has made. Currently, 23 credit unions participate in the CAP program. Russell pointed out that the one credit union declining to renew its participation in the program, did so to be able to pump funds into a 2008 regional natural disaster recovery.
"We don't consider these loans at all a very high-risk venture," explained Mike Harvey, executive vice president with the $1.5 billion Veridian Credit Union, headquartered in Waterloo, Iowa.
Harvey recounted that Veridian had not seen much of an increase in delinquency in its $76 million card portfolio and that the credit union's board of directors was eager to participate in something they saw as a collaborative effort in the credit union industry.
He also noted that TMG's strong reputation has positioned it well to work with credit unions still considering outsourcing their credit card programs.