Study Claims Political Influence In CUs' Access To Bailout Funds

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WASHINGTON-A study that concluded that politics influenced which of the 189 credit union applicants received capital infusions from the the Troubled Asset Relief Program (TARP) was categorically rejected by the National Federation of Community Development CUs.

The study, titled "Political Influence and TARP Investments in Credit Unions," shows that CUs located in the districts of members of the House Financial Services Committee were three times more likely to receive TARP funds relative to other eligible CUs. "The predicted probability that a typical credit union will receive TARP monies jumps from 23% to 76% if the credit union lies in the district of a House Financial Services Committee member," said Linus Wilson, a professor at the University of Louisiana at Lafayette-College of Business Administration, who has conducted numerous studies on TARP.

Of the 189 CUs that applied for capital infusions under the Community Development Capital Initiative, 48 were awarded a total of almost $70 million in funding. The funding was supposed to have gone to financial institutions that had at least 60% of their lending and other economic development activities in areas underserved by traditional financial institutions. The TARP awards allowed the recipients to borrow the money at a 2% rate for eight years.

Many of the recipients, including Hope FCU, Santa Cruz Community FCU, Opportunities FCU, North Side Community FCU and Neighborhood Trust FCU, are regular participants in federally funded community development programs, such as the Treasury's annual Community Development Financial Institutions program.

Wilson said he found many of the credit unions receiving the bank bailout funds did not have high lending ratios. "It didn't seem like the credit unions had a need for doing a lot of lending," Wilson told Credit Union Journal. "They had a lot of their excess cash in investments."

"They seemed to be doing significantly less lending than institutions that weren't getting any [TARP] money," Wilson said. What the findings suggest, he said, "was that they were not really selecting institutions based on the goal of the program."

But the Federation, which served as the primary technical advisor to the majority of the 11 CUs that applied for secondary capital loans through CDCI, maintains that the study's conclusions were just plain wrong.

"Wilson's entire analysis is based on the erroneous assertion that 'roughly a quarter of the eligible credit unions, 48 out of 189' were selected to receive CDCI funds. But both the numerator and the denominator in this fundamental equation are incorrect," said Federation Executive Director Cliff Rosenthal. "Wilson states that 'Forty-eight of the eligible credit unions were selected to receive TARP funds.' In fact, we know that at least 72 credit unions received final approval for CDCI secondary capital loans, and at least 24 of these credit unions declined to accept the investment."

A primary problem with Wilson's analysis, the Federation said, was how he determined which credit unions were eligible for the program in the first place.

"Wilson defines 'eligible' credit unions as follows: 'There were 189 credit unions in the CDFI program at the start of September 2010. Only CDFI-certified credit unions were eligible for the TARP's Community Development Capital Initiative (CDCI).' This is incorrect on two fronts: credit unions were eligible for CDCI only if they were both CDFI certified and had an official Low Income Credit Union (LICU) designation from NCUA. The list of 189 credit unions considered 'eligible' in Wilson's analysis included credit unions that were not eligible for CDCI because they were not LICUs. Wilson's analysis also considered a number of 'eligible' credit unions that no longer exist, but have not yet been purged from the CDFI Fund certification list. At the launch of the CDCI program, we counted 135 credit unions that were eligible for the program, holding both CDFI certification and LICU designations. This number grew to 153 by the end of September 2010, and while this remains far short of the 189 considered eligible in Wilson's analysis, it ignores a more significant fact: according to NCUA, only 111 of these fully eligible credit unions actually applied for CDCI loans."

The Federation went on to say it has other "serious problems" with the paper, including the fact its author "admits that he does "not know the identity of credit unions that applied for TARP funds." The Federation said it looked at the percentages of credit unions located in districts represented by members of the HFSC, and found the following:

• 7.1% of CUs that applied for CDCI investments were located in HFSC districts.

• 6.9% of CUs approved for CDCI investments were located in HFSC districts.

• 7.7% of CUs rejected for CDCI investments were located in HFSC districts.

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