Corporate CU Network Fallout Reveals the Opportunities to Be Had
What has the diminished role of corporate credit unions meant for CUSOs of natural person credit unions? The answer is some challenges but lots of opportunities.
Some CUSOs benefited from corporate credit unions as investors and lenders. However, the loss of the corporate credit unions as a capital and liquidity source is not of great significance to most CUSOs. CUSO capital and lending potential in the industry is less than 15% of the industry's CUSO investment capacity and less than 10% of the industry's CUSO lending capacity.
CUSOs that make residential mortgage loans, member business loans and credit card loans need more capital and liquidity than CUSOs providing other services. Often, the owner credit unions' CUSO investment and lending powers are not sufficient to fully fund the opportunities presented. In those cases, loans and capital from the corporate credit unions will be greatly missed. In addition, the amount of large scale operational services CUSOs is growing in number and scale. The day is not far off when operational services CUSOs will have greater capital and loan demands that could have been aided by a strong corporate credit union system.
Despite the corporate melt-down and the resulting reduction in available capital, there is still plenty of capital in the industry at this time. We need to find new means of moving capital from capital-rich, opportunity-starved credit unions to capital-starved, opportunity-rich credit unions and CUSOs. A corporate credit union is essentially a collaboration of credit unions to aggregate capital for investments and liquidity. CUSOs, also collaborations of credit unions, have the tools to meet many of the capital and investment challenges facing credit unions. Let's talk about some cases in point.
TMG Financial Services Inc., a CUSO out of Iowa, buys credit card portfolios from credit unions desiring to sell their portfolios to a credit union-oriented lender. To fund this operation, TMGFS has a collateralized advance program that takes loans from credit unions to fund the purchase the portfolios. The loans earn very favorable returns for the lending credit unions in today's marketplace. The credit unions participating in CAP do not have to be sellers of credit card lending portfolios. Any credit union can participate. To date, more than $115 million has been raised from over 60 credit unions. TMGFS has filled two roles previously filled by corporate credit unions. It has facilitated the movement of capital from one credit union to another and has provided a return on that capital to the lending credit unions.
Natural person CUSOs that issue loans have approached TMGFS and asked if it can help raise loans from credit unions to fund the liquidity needs of their lending operations in order to take advantage of opportunities presented to the CUSOs. To this end, TMGFS has formed CU Structured Finance LLC. Its first client is an established mortgage lending CUSO that used to rely upon a corporate credit union for a warehouse line of credit. CUSF is putting together a syndicate to fund a one-year line of credit commitment at rates higher than can be obtained by traditional credit union investments.
Other CUSOs are looking to fill other service needs of the industry. There are CUSOs that are exploring the creation of registered mutual funds with the underlying assets of student loans, member business loans or residential mortgage loans. These mutual funds would have high quality control over the loan products in order to earn a registered investment status. If approved by all the regulators involved, the funds would enable credit unions to buy high-quality performing investments in the very assets that drive credit unions: loans to members.
These mutual fund shares may take the place of loan participations in a credit union's portfolio. This might be a good thing as the quality control in the registered mutual funds would tend to be higher industrywide than presently demonstrated in the purchase of individual loan participations. By selling into registered mutual funds, credit unions can reduce loan concentration risks and credit unions can better manage the aggregate member business lending cap.
The very existence of these funds will elevate the loan quality as more and more credit unions will want to be able to meet the underwriting criteria to sell loans into the funds. Facilitating the movement of capital and liquidity within the industry is essential and CUSOs are equipped to be that facilitator.
One final role for CUSOs in the corporate credit union world is to use CUSOs to invest and hold investment securities for corporate credit unions in order to reduce risk in the corporate credit union and the share insurance fund. In the hands of innovative people, CUSOs are able to find solutions to many of the issues facing the industry, including those issues posed by the reduced role of corporate credit unions.
Guy Messick is an attorney with Messick & Weber PC and general counsel to NACUSO. He can be reached at 610-891-9000 or firstname.lastname@example.org