Flying under the radar can be a good thing, but not if it leads to being left out of something beneficial, as one small niche of the credit union movement learned — and only just recently resolved.
When credit unions were given access to the Federal Home Loan Bank System in 1989, only federally insured credit unions were specifically mentioned in the enabling legislation, leaving out the relatively small handful of privately insured state charters.
"It was an oversight by Congress," according to Dennis Adams, president and CEO of American Share Insurance, the Dublin, Ohio-based provider of private insurance.
It's an oversight that's easy to make, as privately insured credit unions make up just 2% of the total credit union industry and 15% of the state-chartered CUs in the nine states that allow for private insurance. Currently, PICUs constitute 1.2 million members and more than $15 billion in assets.
Looking at the numbers, it might appear to be a minor oversight and one that would be easy to resolve, but it would be 26 years before that finally happened. This past December, PICUs were given the ability to join the FHLB, an alternative source of liquidity and housing finance that can contribute to a CU's product offerings. "It really took away a discriminatory feature," Adams said.
The change, inserted at the request of Financial Services Chairman Rep. Jeb Hensarling, R-Texas, and Sen. Joe Donnelly, D-Ind., was included as rider legislation amongst many other additional provisions to a nearly 500-page, $325 billion piece of transportation legislation.
There are 125 PICUs in the U.S. and the total in the US has declined, on average, by 3.4% each year since 1997, according to Credit Union National Association data. "We are an option, but we are a private program that works safely and soundly. We are very efficient, strong but smaller," Adams said. Since 2005, 20 CUs have converted or merged into a PICU, while 31 PICUs have converted or merged into a Federal charter, according to NCUA data.
Although the PICU industry is small, they still originated close to 20,000 first and second mortgages in 2015 that amounted to close to $2 billion, according to CUNA data. The industry holds around $5.5 billion in outstanding mortgage loans as of 1Q 2016.
Adams believes access to the 11-region system that supports housing financing and community investment is, "A very valuable right and power," in addition to being a strong resource for the CU industry as a whole.
Lucy Ito, CEO of the National Association of State Credit Union Supervisors, stated the change was, "the right thing for congress to do." Ito suggested that when the most recent financial crisis hit, there were huge issues surrounding liquidity. With those issues mostly subsided, Ito believes that people wanted the change to be made.
"Having access to the FHLB liquidity pool is good for the entire credit union system. Having diverse sources of liquidity brings stability to the system knowing you have more than one place to go to for liquidity," Ito said in an interview.
Wabash, Ind.-based Beacon Credit Union was the first PICU to join the FHLB system in early June this year; they will be a member of the Indianapolis region of the FHLB. The CU, which serves 50,000 members, described the application process as "pretty painless."
"It was very simple, they had a complete application system on the internet, we contacted them, answered their questions and had it turned into them," said Kevin Willour, president/CEO at the $1.2 billion institution.
Beacon currently provides the standard home lending products for their members and also conducts a significant amount of business in the agriculture sector. "It gives us more flexibility in the liquidity arena, and we can make more mortgages," Willour said, "When our loan to share ratios get up there without us having the ability to sell our mortgages we are kind of limited at what we can do."
The FHLB Indianapolis region branch said that new PICUs approved for the system will have access to, "a safe, consistent and reliable access to the capital markets and the secondary mortgage market at a competitive price," according to a spokesperson for the branch. The process to join is the same federal insured credit unions, the spokesperson added, except that PICUs must first submit a written request to their respective state supervisors.
Another Midwest credit union, Credit Union 1 based out of Rantoul, Ill., was also been approved to join the FHLB system in June, becoming a member of FHLB Chicago. "Ever since we got more heavily involved in mortgages we wanted access to FHLB. We were very disappointed when we first went to apply and found out we couldn't be members," Paul Simons, president/CEO of Credit Union 1 said in an interview.
The $785 million CU has offered long-term mortgages since 1994 and had been eager to become a member. Simons notes that besides the FHLB, there are not many "reliable" liquidity sources available to CUs, which was one of the motivating factors when the 100,000-member CU was inquiring about joining.
Simons described the process of working with FHLB as very simple and intuitive. "They are just easy to work with, they met with us, explained everything," Simons said, "I am highly complementary of their whole process; they make it extremely easy to go through the application."
PICUs are not hesitating to apply for membership in the FHLB system. "We have three approvals already," ASI's Adams said, "and we have applications in the San Francisco FHLB, the Dallas FHLB and the Cincinnati FHLB."
Interra CU, based out of Goshen, Ind., was also approved to join the FHLB Indianapolis branch in June this year. The 66,000-member CU's President/CEO Amy Sink said the process was "simple." Sink had previously been with a CU that had joined the FHLB in 1990 and was well aware of the products offered and the approval process.
"It's not a replacement for our member's savings accounts — it's a different source of liquidity," the CEO said. "The FHLB is a very powerful tool that gives us the ability to manage risk, earnings and the important part, it helps us make more loans to our members."
Recently, federally insured CUs are looking into the option of switching to the private insurance model, Dennis Adams suggested. "We have CUs that are federally insured that are members of the bank and have been for years, and they are looking to convert to private insurance," Adams believes the decision not to switch has hinged on the FHLB ruling.