Michigan Bills Allow Wider Acceptance of CUs in CD Swap Network
Michigan Senate bill 195 and House bill 4397 have cleared several legislative hurdles and as of this writing, were headed to the governor's office for signature, according to Marcia Hune, director of legislative affairs at the Michigan Credit Union League. Introduced by Michigan Sen. Tony Stamas (R-Midland), the Senate bill involves local governments. The House bill, authored by Rep. Jeff Mayes (D-Bay City), would allow school districts to invest in credit union certificates of deposit.
While the state's credit unions can serve as parking spots for CD for schools and municipalities, Hune said they are not considered members of the Certificate of Deposit Account Registry Service program because the network restricts membership to FDIC-insured banks. Formed in 2003 by the Promontory Interfinancial Network in Arlington, Va., the program has more than 2,900 financial institutions as members. Several hundred credit unions are depositors, which are different than being members, said Phil Battey, vice president of legislative and public affairs at Promontory Interfinancial. The Bank of New York Mellon provides record keeping, settlement, issuance and custody support for the network.
When a large deposit is placed with a member of CDARS, that institution uses the network to place funds into CDs issued by banks. This occurs in increments of less than the standard FDIC insurance maximum to ensure that both principal and interest are eligible for full FDIC insurance, according to CDARS.
Through a matching system, network members exchange funds. This transaction occurs on a dollar-for-dollar basis, so that the equivalent of the original deposit comes back to the institution and can stay within the local community. With consent, members can also receive fee income instead of matching deposits. In either case, the full amount of the original deposit becomes eligible for complete FDIC protection.
"Last year, banks opened up two acts to use those deposits and then turn them around to invest in CDARS," Hune said. "The law didn't allow credit unions to go the extra step to use CDARS. We wanted to be included but there was not enough time to make the change."
Battey said over the years, CDARS has explored how credit unions could become members of the network but the hurdle has been the FDIC restriction.
"The common bond requirement is problematic, and it is an obstacle in a legal sense," Battey said. "For a depositor, if it's a credit union, there's not a common bond with FDIC banks."
Hune said if credit unions are not allowed to become CDARS members, there has been talk with CUNA and the Promotory Interfinancial to possibly develop an exchange strictly for credit unions. Battey confirmed the network is in "very, very early" discussions about forming an intra-credit union equivalent.
"We don't know if there is a demand for this from credit unions, but we are certainly working to find out," Battey said.
With access to full insurance, CDARS members do not have to deal with surety bonds and collateralization requirements, according to the program's Web site (www.cdars.com). There also is no need to manually consolidate account statements or interest disbursements on a recurring basis or footnote uninsured deposits in financial statements.
"Credit unions in Michigan can take deposits from schools. Some states don't have that luxury," Hune said. "We always argue that credit unions are safe and secure and no one has lost their [CDs] so far. It's also a convenience issue. Credit unions can help consumers turn around and invest their money."
Mo. Small Biz
Despite some objections, a program to create a $2 million pool of funds that would make available low-interest and no-interest loans to small businesses is moving forward.
So far, a Missouri credit union, a nonprofit organization and a few regional planning commissions have signed on to administer the program.
The Missouri Department of Economic Development and the Missouri Development Finance Board would create the fund, according to an executive order signed by Missouri Gov. Jay Nixon in January. The fund, which would come from participation fees collected on MDFB contribution tax credit program income, would provide 80 loans of $25,000 each to small business owners in Missouri.
Nixon's right-hand man, Lt. Gov. Pete Kinder, was concerned that the loans would not make much of a dent in the state's economy given their small size, the Kansas City Star reported in an April 21 article, the same day the MDFB voted to move forward with the fund. According to Nixon's office, small business can now submit loan applications.
The name of the Missouri credit union will not be released until after an adminstrator for the fund has been officially chosen, said John Fougere, director of communications at the Department of Economic Development.
"Small businesses are the heart and soul of Missouri's economy, and tough economic conditions have hit those businesses hard. In order for these businesses to do more than just keep their doors open, for them to actually create new jobs to grow the economy, small business owners need access to capital," Nixon said in a statement.