ABA Calls for More `Public Scrutiny' on CUNA Mutual's New MBL Pilot Program

MADISON, Wis. – The American Bankers Association wants to put the brakes on a new member business lending investment fund pilot at least until more details are provided on how it works. At issue is the new CU Systems Fund from CUNA Mutual Group, which would allow for the purchase of business loans from credit unions and the sale of shares in them to interested credit unions. Each share owns an undivided interest in the diversified portfolio of loans held in the fund. CUNA Mutual said it will put $25 million towards the fund. One loan has already been purchased and for the time being, the pilot limit is $1 billion. Share sales are expected to come in May. NCUA gave CUNA Mutual the green light to proceed with the pilot at its March 17 board meeting. The approval came after more than a year of communication between the two on the fund. In a March 30 letter to NCUA Chairman JoAnn Johnson, the ABA said more details are needed on the fund to “allow for proper public evaluation,” wrote Jim McLaughlin, ABA director of regulatory and trust affairs. “It is important that the pilot program not be open to application, in the name of “enhancing credit union business lending,” that would in practice undermine the prudential limitations on business lending established by Congress or allow risky new ventures for credit unions,” McLaughlin said. Specifically, the ABA wants to know how purchased participations or the transfer of loans into the pilot program will be allocated against member business loan limits. “Certainly, it cannot be contemplated that the mere transfer of a member business loan into the program would cause that loan to disappear from all member business loan limits, as that would be a transparent circumvention of the Congressional mandate,” McLaughlin said. McLaughlin also asked how capital allocations for such assets for buyers and sellers and risk issues would be handled. “Are any asset enhancements envisioned? If so, how will they be provided and how will any risk transfer be recognized?” he asked. According to CUNA Mutual, the new investment opportunity allows for greater liquidity and “is expected to offer attractive yields given its risk characteristics.” It also aims to provide an efficient secondary market alternative to loan securitizations and participations and professional portfolio management and diversification from CUNA Mutual and its registered investment advisor, MEMBERS Capital Advisors. “We respect that (the ABA) has concerns and they have raised them with the appropriate party,” said Kevin Thompson, vice president of product development for CUNA Mutual’s Credit Union Financial Solutions Group. “We’ve submitted the pilot application and received approval and the plan is to move forward.” Thompson said CUNA Mutual believes “this is a good program for credit unions” and the ABA’s March 30 letter to Johnson “doesn’t change anything.” Thompson estimates credit unions have more than $150 billion invested outside the credit union system and the fund will help keep credit union-originated loans in the credit union system while exposing participants to different asset classes. Meanwhile, McLaughlin went back to a Sept. 24, 2003 meeting when the NCUA Board adopted its revised MBL rule regarding the treatment of participation interests that credit unions would not be enabled to “circumvent the aggregate cap” through participations. The pilot “does not circumvent the aggregate member business lending limit of credit unions,” said Nick Owens, NCUA special assistant to Johnson and director of external affairs. NCUA’s Johnson had said the agency “looks forward to reviewing the progress of the program and how credit unions benefit from this secondary market alternative.” NCUA Board Member Debbie Matz said the pilot will “require a meaningful participation stake for sellers” (CU Times, March 23, 2005). Still, McLaughlin said the details of the pilot program need to be ironed out before moving forward. “It is only proper that this pilot program be open to full public scrutiny to ensure that the focus of credit unions remains on their statutory mission, and that they not present risks that they are not well equipped or statutorily intended to bear,” he said. “The credit union charter provides significant privileges to credit unions to allow them to meet special purposes established in the law.” [email protected]