Now that U.S. banks have repaid more than 96 percent of the funds invested in them as part of the Troubled Asset Relief Program, the special inspector general for TARP has a new target: credit unions. Like other financial institutions, credit unions took money from the Treasury Department during the financial crisis: through the so-called Community Development Capital Initiative, Treasury invested $570 million in small banks and credit unions. As noted in a Venable LLP client note on June 3, CDCI was designed to “support small-business lending in the ‘hardest hit’ rural and urban areas by making low-cost capital available.”

The problem is that four years after the program’s creation only 8 of 48 credit unions have repaid the money in full and exited the program. Taxpayers are still owed $475.2 million. SIGTARP doesn’t expect any rush by credit unions to settle the bill. In its April 30 report, SIGTARP said credit unions only pay Treasury a 2 percent dividend for the capital (until 2018, when the rate climbs to 9 percent), so many credit unions would likely remain in CDCI for a few more years. In addition, “credit unions continue to face  economic challenges that impair their financial stability and ability to repay TARP,” said Venable.

credit union“Capital and balance sheets of credit unions have suffered over the last few years due to increases in loan delinquencies and loan charge-offs and decreases in lending activity,” SIGTARP said. Recipients of CDCI money had to be designated community development financial institutions, which means they have to make 60 percent of their loans to underserved communities; therefore, many of them “serve the most economically harmed areas around the country that continue to struggle to recover from the financial crisis,” noted Venable.

Meanwhile, a story in The Wall Street Journal on June 5 discussed how many credit unions are loosening lending standards for mortgages and home-equity loans and investing in longer-term assets, making their balance sheets vulnerable if interest rates start to rise. According to the National Credit Union Administration, the credit union regulator, credit unions’ net holdings of long-term assets rose to 35.9 percent of total assets at the end of 2013, an all-time high.

In its report, SIGTARP called for much stronger oversight of CDCI institutions. It recommended that credit unions be required to report annually on their use of CDCI funds and called for Treasury to enforce the TARP provision that allows the department to participate on the board of directors of a CDCI institution that misses eight dividend payments. Both measures would help Treasury “keep careful watch over the financial stability of these institutions,” SIGTARP said.

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One response to “Ailing Credit Unions Draw Attention of TARP Watchdog”

  1. We heard from Bill Hampel, president & CEO of the Credit Union National Association (CUNA). Here’s what he said about the story:

    The credit union experience with the Troubled Asset Relief Program (TARP) was unlike the bank experience with TARP in almost every respect. Your recent article (“Ailing Credit Unions Draw Attention of TARP Watchdog” 6/10) links the two together in some misleading claims. Credit unions never “took money;” they borrowed money. The Community Development Capital Initiative (CDCI) funds were loans, not bailouts or handouts. The article reports that $475 million in CDCI funds remains unpaid, but doesn’t specify that banks account for roughly 90% – $425 million – of this total. The 40 credit unions that have not yet repaid the Treasury Department for these loans owe a total of $50 million and on average, each of the 40 credit unions owes $1.2 million. There is no “problem” associated with the fact that most credit unions haven’t repaid CDCI funds. In truth, it would be surprising if they repaid at this point. The CDCI capital notes had terms of 8 years or 13 years and any credit union that wanted to prepay would have to obtain waivers and approval to do so from National Credit Union Administration (NCUA), the federal agency that supervises credit unions. None of the CDCI participant credit unions have defaulted on their obligations. In fact, the SIGTARP report which this article is based off found that by the end of March 2014, only two CDCI institutions were not current on their dividend/interest payments – and both were banks. Credit unions continue to pay and they continue to provide a vital service in using the funds to support financially stressed credit union members and small businesses.

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