"As a result of these restrictions, prominent credit union members oftentimes could not obtain a business loan through the credit union usually because their businesses were located outside the credit union's FOM and the other owners of the business were not credit union members," Loritz said. "At the same time, this restriction prevented member business lending officers at many credit unions from being able to make loans to some of their best clients."

Loritz and his partner, Todd Okun, a former NCUA assistant general counsel, started their fact finding efforts with Kenneth Sayre-Peterson, acting general counsel with California's DFI. After a series of phone conversations and a formal inquiry March 6, Sayre-Peterson responded back on March 12 agreeing with their analysis.

"We believe that the language of Section 14950(c) is clear, and we agree with your assessment that California credit unions are permitted to make business loans to entities that are not eligible for membership provided that the loan has a joint applicant and co-obligor who is a member of the credit union," Sayre-Peterson wrote in the letter. The DFI attorney emphasized that any such loan must be made in accordance with the credit union's lending policies and comply with all applicable guidelines and regulations.

"Further, it must be emphasized that the non-member co-borrower must not be extended any other benefit or service of the credit union solely as the result of participation in a loan as a joint applicant and co-obligor," Sayre-Peterson said.

To illustrate, Loritz provided the following example based on an actual case: Suppose that XYZ LLP is a limited liability partnership that is not a member of ABC Credit Union and does not fall within the credit union's FOM. One of XYZ's three partners is a member of the credit union. Under prior law, the credit union would be unable to make a business loan to XYZ because the neither the entity nor all of the partners are eligible for membership.

Under the new law, however, the loan is permissible so long as the member-partner applies for a business loan jointly with nonmember XYZ, Loritz said.

"The example assumes that XYZ is a limited liability partnership, however, the same conclusion is reached regardless of the type of business entity, [for example], a limited liability company, C-corporation, S-corporation, general partnership or limited partnership," Loritz explained. "As such, member business lending for California state-chartered credit unions now expands to literally any business so long as a member of the credit union. Usually one of the owners of the business is a co-borrower."

NCUA rules and other California laws still apply. The state's DFI also pointed out that just because credit unions can now make member business loans to nonmember entities with a member as a co-borrower does not mean that the nonmember entity qualifies for membership in its own right.

"Most credit unions are not aware of this legal opinion," Loritz said. "Federal and state-chartered credit unions in other states should perhaps contact their leagues and NCUA to see if anything [similar to what was done in California] can be done at the state and federal levels."

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