In Launching Finance CUSO, TMG Rides What Could Be a Wave of Change
Citing changes in some long established economic patterns and the strengths of credit union cooperation, TMG Financial Services launched a finance CUSO that will help other CUSOs fund their operations, particularly their lending.
TMG Financial Services is a subsidiary of TMG, a card processing CUSO that is affiliated with the Iowa Credit Union League.
Building on its previous success and experience with financing the purchase and management of credit union credit card portfolios, TMG Financial Services has announced it will do something similar for other CUSOs seeking credit lines.
The CUSO has long given credit unions the opportunity to invest in its purchase and management of CU credit card portfolios called the collateralized advance program. Through the CAP, credit unions are able to finance TMG's acquisition of new CU card portfolios and, in return, earn interest on their investment that is often sharply better than that available from other investments.
The new CUSO, which TMG FS has dubbed CU Structured Finance, will build on that idea, according to TMG Financial Services CEO Jeff Russell.
"Credit unions have more liquidity than ever before and qualified loan demand is soft," said Russell. "CU Structured Finance is adding the surplus liquidity to a need resulting from a shifting and greatly diminished corporate network. As it stands today, there is no industry conduit to promote partnerships among credit unions outside of their own geographic regions."
Russell said that many corporate credit unions, in the wake of the corporate crisis, have cut their lending to CUSOs in particular, reeling back the credit lines for lending CUSOs in particular.
"CU Structured Finance will provide a way for a mortgage CUSO to have access to a warehouse line of credit for its business," Russell said. "Corporates used to provide this kind of loan, but they will no longer be able to do so."
CU Structured Finance will begin with helping primarily lending CUSOs, Russell explained, but would likely branch out to helping service CUSOs later. Lending CUSOs would be the primary focus because, in general, they are dealing with products that can be collateralized.
As an example Russell brought up a mortgage lending CUSO with which TMG is currently working on CU Structured Finance. Russell declined to name the CUSO but said it has been suffering for a while without an adequate warehouse line of credit for new mortgages.
Warehouse lines of credit are those lenders use to finance new mortgages during the period, usually 60 or 90 days, between when they fund a mortgage that conforms to secondary-market criteria and when they actually sell the mortgage on the secondary market.
Traditionally, corporate credit unions provided these kinds of loans, but Russell said changes in the corporate credit unions, both their business plans and regulations, are going to preclude this lending.
"The collapse of the corporate credit union structure has created a profound void in funding availability for the simple reason that the corporate credit unions have been the ultimate financial resource for credit unions and CUSOs. They have provided settlement services for payment systems, broker-dealer services, short-term liquidity and institutional funding for CUSOs," Russell wrote in a white paper TMG issued to support and explain its new CUSO.
"Credit unions and their CUSOs will be facing long-term issues as they seek to replace that funding mechanism. Individual credit unions certainly have problems stepping up and filling the gap. Federally charted credit unions are bound by the restrictions set forth in Rule 712.2 that states credit unions can only invest or loan 1% of assets each to a CUSO-that's limiting when you think of all the different CUSO interests credit unions have. State chartered credit unions usually fare a little better with a slightly higher limitation, sometimes as much as 5% of assets," he added.
But in the white paper, "Credit Union Collaboration: The Future of Investment Capital," Russell argued that this sort of arrangement is the way the credit union industry should go to continue building on one of its strengths: credit union's willingness to cooperate on common goals.
"There is an immediate need for transformational change," Russell wrote. "It begins with us looking for ways to collaborate, and yes, that means with capital. There are credit unions with liquidity. There are credit unions that need it. There are credit unions and CUSOs that have specific expertise in a product or service, and there are those that could use it. Yet, there is no efficient way for one to help the other-to leverage the power of our network. How we build that model will determine the industry's ability to step up and serve even more members," he argued.