Keith Leggett, ABA blogger, continues to criticize credit unions for investing in business loan participations. His recent “Goose Egg” blog post is the latest post on this topic. The usual complaints are that participations represent mission creep away from consumer loans to those of modest means, are not direct loans to a credit union’s members, and that credit unions and their regulators lack the expertise to ensure that participations are prudently executed. Although not all credit unions have handled their participation loans well, these banker complaints fall far short of being compelling reasons to block credit unions from investing in business loan participations.
The banker trade associations have a long record of labeling as “mission creep” anything that a credit union does to serve its members that differs from what a credit union did in 1934 when the Federal Credit Union Act became law. In reality, credit union business lending was not artificially restricted until the law was changed in 1998. And participations are counted toward the 12.25% of assets or 1.75% of capital cap on business loans.
Technically and semantically participations might not be made directly to members, but that doesn’t mean that members don’t benefit from their credit union’s involvement with participations. Participations are an alternative form of investing the credit union’s surplus funds that are not needed to meet the membership’s direct borrowing needs. Most credit unions would prefer to make direct loans to members, whether for business or other purposes. However, the current down economy has contributed to a significant drop in borrowing by members. The credit union has an obligation to generate income with those surplus funds to support everything it does for its members.
Most credit union business lenders recognize and respect the special requirements of direct lending and participations. To prudently engage in business lending participations requires specialized staff, compliance, legal and regulatory considerations – and often these are beyond the reach of smaller credit unions. However, with proper due diligence these smaller credit unions can cooperate in business loan participation programs operated by third party vendors and credit union service organizations. Regulators are also in tune with these special requirements – even learning from past mistakes -- and are continually investing resources targeted toward best practices safety and soundness supervision of these activities.
A credit union’s members are not negatively affected by prudently made participation loans or member business loans. Instead these assets fill in gaps in the credit union’s balance sheet. The restrictive and unreasonable cap on credit union member business lending, and its concurrent impact on participations, serves no legitimate public policy purpose. Increasing the cap means more loans to small businesses and the economy benefits accordingly. This is true whether of not the loan is a direct loan by the credit union or a participation that provides liquidity for another credit union to meet members’ business loan needs. The positive effect to the small business borrower, the local community, and the economy is the same.
