NCUA last week approved a pilot program allowing CUNA Mutual Group to buy credit union loans, package them into funds and then sell shares in the funds to individual credit unions.
"This is something we think is pretty unique. It borrows some things from other offerings, but the way we put them together is unique," said Kevin Thompson, vice president for product development at CMG's Financial Solutions Group, of the program to be known as CU System Funds.
CUNA Mutual hopes to create a whole new secondary market for various types of credit union loans through the funds, helping boost credit unions' liquidity, while expanding their investment options. So the first fund, capitalized by CUNA Mutual with $25 million, will buy member business loans. The company has already purchased $1 million of MBLs from one credit union and has commitments to buy more from several others, according to Thompson.
Plans call for additional funds for credit card loans, car loans, mortgage loans, community development loans and other types of credit union-only paper. CUNA Mutual plans to buy credit card receivables, for example, from the new credit card bank it chartered, known as Union Financial, and acquire business loans from credit unions participating in its MEMBERS Business Solutions.
The loans will be managed in-house and not securitized, and the payout on the funds will be determined by loan experience, fees, pre-payments, and default rates, among other things. There will be no guaranteed returns.
"This will help keep good credit union-originated assets within the system and allow other credit unions to benefit," said Thompson.
It will also help maintain the member relationship as the credit unions selling the loans into the funds will retain the servicing. In addition, the development of uniform underwriting standards for the various type of loans will "raise the bar for other loans," said Thompson. "We hope that it creates scale and efficiency in the process."
Because the funds will be similar in structure to hedge funds, those sold to wealthy, well-informed individuals, it will not require Securities and Exchange Commission registration, according to Thompson. Under the pilot phase of the program, CUNA Mutual has agreed to limit the size of the program to $1 billion before returning to NCUA for review.
