Utah court issues preliminary injunction, CUSOs allowed to continue business loans above $250,000 limit

SALT LAKE CITY – Mountain America Credit Union is celebrating a temporary victory that bides enough time for the judicial system to determine whether limits on commercial loans pose a “competitive disadvantage” with banks here. On Oct. 10, Utah’s District Court issued a preliminary injunction that prevents the Utah Department of Financial Institutions from enforcing a newly-adopted rule that limits a CUSO’s member business loans to $250,000 and caps the total number of business loans that can be disbursed. The rule would have also required borrowers to be members of a state-chartered credit union for six months prior to loan disbursement. “This is the third time we’ve won,” said Gordon Dames, president/CEO of Mountain America Credit Union. “What upsets us is this arbitrary legislation from DFI that comes out of nowhere. We’re not sure what the reasoning is for wanting to apply (business loan) restrictions to CUSOs.” The injunction allows CUSOs to disperse loans above the $250,000 cap until the case can be litigated in court, a process that could take up to four years, Dames said. DFI’s Rule R337-4, Establishment of CUSOs technically went into effect on Oct. 4. In addition to the loan cap and membership requirement, the rule caps the total number of business loans that can be disbursed. Dames argued that the bigger issue seems to be whether credit unions are being given the fair chance to compete. He added that loans are not disbursed willy-nilly to anyone walking in the door. Like any loan application process, borrowers must have “good credit and sound qualifications.” CUSOs are also only allowed to invest 5% of their total assets – in Mountain America’s case, it’s $55 million. Large business loans are typically processed as participation loans to be shared with other credit unions.”Diversification is safety and soundness,” Dames said. “We wouldn’t put more than 2% or 3% of assets in one loan.” With roughly $20 million “in the pipeline” including a request for a $2.8 million loan, Dames said the CUSO is trying to do it’s part to revitalize the state’s economy during a period of financial downturn. “For some small business owners, a commercial loan is the lifeline to survival,” Dames said. “In turn, those businesses help to revitalize the state’s economy.” The “battle” started in 2000 when Mountain America Financial Services issued two member business loans for $768,750 and $525,000 with the understanding that the transactions were allowed under the current state law which allowed CUSOs to originate commercial loans separate from the credit union. At nearly the same time, Dames said the credit union also filed a request with DFI for clarification on whether the $250,000 lending limit applied to loans made by the CUSO. When the regulator deemed that the maximum limit did indeed apply to CUSOs, Mountain America sued in court and won. It was that decision made by Judge Glen Iwasaki who ruled that CUSOs are separate entities from credit unions and should not be governed under the same regulations that Utah’s DFI is appealing, said DFI Commissioner Ed Leary. Leary told Credit Union Times that the issue has always been whether a credit union through a CUSO can engage in “unrestricted and unregulated lending.” “The department’s concern ties back to protecting credit union members who may be affected should lending losses occur,” Leary said. “While credit unions have a buffer zone should lending losses occur, we will have to step in” if a CUSO suffers the same outcome. “I think it’s very appropriate and germane for a regulator to step in and pose some limits,” Leary said in response to the criticism he’s received that he’s buckling to banking interests. “It’s not a bank and credit union issue but credit unions want to paint it that way,” Leary said. “If it had went the other way, would the banking people have sued – probably.” Leary said it’s anybody’s guess as to how long the injunction will be in place, but a hearing is set to take place in spring or early summer 2003. “It’s the unknown after that,” Leary said, adding that an 11-month process of rewriting the rule will occur if the scenario goes in the other direction. Meanwhile, with one hurdle surpassed, Dames said DFI will have a difficult time proving how the lending rule violates any state law. “The regulator will have to show how the rule will impair the state,” Dames said. “Right now, we would like to get on with serving our members not fighting legal battles.” -