Back in December, Keith Leggett posted an article on his blog, Credit Union Watch, about non-member business lending. To summarize the post:
The reporter was shocked that credit unions were funding business loans to nonmembers, as this seems to contradict the raison d’etre for credit unions as membership organizations.
He then stated a few statistics from the call report picking the top 10 CU’s with non-member business loans, otherwise known as participations. In my response, I stated:
By selecting large CU’s, their participation numbers will obviously be large, but it effectively gets your alarmist point across. I’d bet you a beer that their %’s are inline with the industry.
Keith then did some more follow up work about my comment, posted at Beer Summit Part 2. As is common with statistics, they can be sliced and diced so many ways that nearly every point can be made with the same data, as Mark Twain also believes. That being said, Keith is correct. The top ten credit unions in terms of total business participations do have a higher concentration of participations against assets. However, the numbers simply come down to how you want to look at them.
Simplistically, this is simply a sign of a more advanced business lending credit union. These top ten credit unions use participation loans differently then the rest of the industry according to their investment needs. In an effort to compare credit unions based on the similarity of their philosophy on business lending and investments, I took the list of 700 or so credit unions with business participations and further split it out based on those credit unions who have the majority of the business lending in participations. This cut the list in half, to 366 CU’s, and I believe this is a more accurate representation of credit unions using advanced business lending techniques. Advanced, however, does not necessarily mean that the credit union is taking undue risk. On the contrary, CU’s who participate more than they actually lend to their own membership recognize that they don’t have the internal expertise and controls in place to appropriately lend funds to their own members, even when lending internally may give them a higher rate of return.
These are the top ten credit unions of those who do more participations than their own business lending. Of the 366 credit unions I mentioned earlier, 84% of their business lending portfolio comes from participations. Of these top ten below, only four (Patelco, Western, Langley, and Keypoint) are higher than the industry average.
By simply looking at two factors, one can never come to an appropriate assertation on a given situation. Just because a credit union has a lower average age than the rests of the industry doesn’t mean that they are the best at social media or have the coolest technology. Nor does having more CUSO’s than the average credit union make you riskier just like having few branches doesn’t make you less popular in your market.
Getting back to the point at hand, I believe credit unions should be able to utilize business lending participations with other credit unions as an alternative form of investment. The creditor is still a credit union member thus overcoming any objections in my book. Additionally, these participations are included in all Risk Based Net Worth calculations so these activities are not putting an undue or hidden stress on the financial strength of the credit union. I would agree with you however, that lending to a real non-member would be beyond the scope of of the Federal Credit Union Act and ancillary regulatory measures and guidance. I understand the stance the ABA and the banks they represent take on this situation as it is coming straight at a major portion of their income. I’m not sure if you lean towards Keynsism or Marxian economics, but I believe the more competition in a given industry, the better the options for the consumers.
So Keith, I owe you a beer. I’ll be in DC for CUNA’s GAC conference the week of February 21st. If you’re in DC, I’d love to meet you for dinner or drinks one night that week and I’m sure some other folks would love a lively debate.