Utah CU Wins Ruling On Business Loans

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A state court granted a request from Mountain America CU for a preliminary injunction barring the Department of Financial Institutions from enforcing new rules that would bring business lending conducted by the credit union's CUSO under the state's credit union rules.

The ruling will allow Mountain America's wholly owned CUSO, Mountain America Financial Services, to continue making business loans above the $250,000 limit set for credit unions and to ignore the new requirement that borrowers be members of the credit union for at least six months before qualifying for a loan.

"We're going to continue making business loans," said Fred Nydeggar, vice president of the state's second largest credit union. "We've got a number of business loans in the pipeline that had been put on hold." That includes several large loans, one of as much as $2.8 million, which the credit union plans to participate out. (See related story, page 8.)

Edward Leary, commissioner of the Utah DFI, said he was disappointed with the court's ruling but said that state regulators will continue their efforts to apply standards to CUSOs.

"Fundamentally, the regulator believes there needs to be some restrictions, some controls on these CUSOs. Otherwise, what you're looking at is unregulated, unrestricted lending," said Leary. The preliminary injunction gives Mountain America CU time to prepare its case that the DFI does not have the authority to set limits on loans provided through CUSOs, as it does for credit unions.

"This is the third judicial ruling in our favor," said Nydeggar, referring to previous administrative and court rulings that the state's credit union rules do not apply to CUSOs.

Because of those rulings the DFI passed new rules attempting to apply credit union regulations to CUSOs. Mountain America CU objects to two major provisions in the new rule: the $250,000 limit per loans, and the requirement that individuals must be members of the credit union for six months prior to obtaining a loan.

Without the restrictions, Leary said state regulators are concerned that credit unions will be able to issue unlimited loans through the CUSOs. As many as eight state chartered credit unions are either providing business loans or planning to do so through CUSOs, according to Leary.

"What we tried to do is put in some restrictions," he said. The issue was forced by Mountain America when it made two large MBLs, one for $768,570 and another for $525,000, through the CUSO in March 2000 as a test of the state's rules. When the credit union petitioned the DFI to determine whether its credit union rules, limiting MBLs to no greater than $250,000, also applied to the CUSO, they were told they did. But an administrative law judge ruled the DFI did not have jurisdiction over CUSO lending. That position was later corroborated by a state court. In response, the DFI enacted new regulations earlier this year which would apply CU rules to CUSOs. It was those regulations that the court barred.

A resolution of the issue is apparently far off, as the earlier court ruling in the credit union's favor now resides in a state appeals court, while a trial on the validity of the state's new rules apply its credit union regulations to CUSOs has yet to be scheduled. Leary suggested that the whole issue, like other credit union controversies before it, may end up in the legislature.

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