The federal government has taken over three financially troubled credit unions this year, and data shows two of them had violated regulatory limits on business lending.
With failures of financial institutions such rare events, the banking industry has seized on the news, arguing it is evidence Congress should not raise the cap on business loans to 20% of a credit union's total assets.
But Bill Hampel, the Credit Union National Association's chief economist, said it is unfair to judge an entire industry on the basis of isolated instances.
"If we had evidence that this actually was the tip of the iceberg, and that there are a lot of other instances of this … I think it would really affect the debate," Mr. Hampel said. However, "this is such an anomaly that it is fairly easy to explain away."
Still, Don A. Childears, the president and chief executive officer of the Colorado Bankers Association, said in an interview Thursday that reports that credit unions got into trouble after exceeding the current 12.25% cap "should affect the debate by making … [lawmakers] say, 'Wait a minute. We're not even sure if what is currently authorized makes sense. The last thing we ought to do is authorize more.' "
Credit unions have been "quite aggressive in business lending and don't necessarily have expertise in that area," he said.
The National Credit Union Administration took over Norlarco Credit Union of Fort Collins, Colo., on May 15. The $334 million-asset credit union announced it last week. According to NCUA data, 23%, or $77.9 million, of Norlarco's total assets were business loans.
The regulator put Huron River Area Credit Union of Ann Arbor, Mich., into conservatorship in February; 72% of its assets, or $193.2 million, were business loans as of June 30, according to NCUA data.
In June the NCUA took over the $24.1 million-asset Peoples First Choice Federal Credit Union in Glen Rock, N.J., whose business loans were under the 12.25% cap but made up more than half its delinquencies.
The first two credit unions are state-chartered, but Michigan and Colorado regulators, like the NCUA, limit member business lending to 12.25% of total assets.
"In both cases the conservatorships were necessary because we saw things about their financial conditions that concerned us," said John McKechnie, an NCUA spokesman. He would not provide further details about the problems there.
"Our intent is to return the institutions to the control of their members when they return to better financial condition," he said.
When asked why the agency kept news of Norlarco's takeover quiet for three months, Mr. McKechnie said the NCUA bowed to the request of Colorado state regulators.
No NCUA-regulated credit unions have exceeded the business lending cap this year, he said.
As the president and CEO of Fort Collins Commerce Bank, a $45 million-asset unit of Capitol Bancorp Ltd., in Lansing, Mich., Gerard Nalezny competes against Norlarco.
Revelations of Norlarco's problems "beg the question, 'Is that really the intent or the purpose of what credit unions are supposed to be doing?' " Mr. Nalezny said in an interview Thursday. "To the extent that you do start to see credit unions jump out of the spirit of what you think they are set up for, it's somewhat concerning as much from a taxpayer's perspective as a business perspective."
The credit unions' ballooning business portfolios accompanied a surge in delinquencies and large-scale losses, NCUA data shows. The $268 million-asset Huron River lost $58.9 million in the second quarter, after earning $1.3 million in the first quarter. Delinquent loans jumped to $37.5 million as of June 30, from $4.8 million six months earlier. Huron River said $36.2 million of the delinquent loans were mortgages and $1.2 million were member business loans.
Norlarco lost $5.1 million in the second quarter, after losing $3 million in the first quarter, as delinquent loans soared to $56 million, from $6 million. Business loans made up more than half of the delinquencies.
The credit union industry is continuing its push for increased business lending authority. A provision in the 2007 Credit Union Regulatory Improvements Act, which Reps. Paul Kanjorski, D-Pa., and Ed Royce, R-Calif., introduced in March, would raise the cap to 20% of assets.
Credit union business lending has increased steadily, from $2.8 billion in 1996 to $23.9 billion last year.
Mr. Hampel argued that business loans are among the safest that credit unions make. Through the first six months of the year credit unions charged off just 0.06% of all business loans, as opposed to 0.44% of all loans, CUNA data shows.
"A couple of credit unions get into trouble every year for doing something stupid," Mr. Hampel said. "It could be a mortgage loan. It could be not managing interest rate risk properly. … This one just happened to be in the context of reporting of member business loans. But if everyone had to be perfect all the time, none of us would be allowed to do anything."
Litigation filed in Florida indicates that at least some of the Norlarco and Huron River loans were made to investors engaged in speculative real estate projects in the state.
At least six lawsuits filed in Lee County accuse Norlarco of aiding and abetting a fraudulent scheme in which investors bought yet-to-be-built homes after developers promised to provide a "'ready made' tenant," who would purchase the house upon completion. When the developers failed to deliver the buyer, investors lost their investments, the suits say.
"Norlarco approved the financing arrangements despite the investor's patent lack of financial qualifications," according to a suit filed on behalf of an investor who had agreed to purchase eight homes for nearly $2 million.
The suit also alleges that Norlarco entered similar transactions with "countless other low-to-middle-income investors."
In addition, both Huron River and Norlarco are named among more than 20 defendants in a suit brought by roughly 50 plaintiffs who say they were swindled into investing in ill-conceived real estate ventures by officials at a fraudulent educational enterprise called "Millionaire University."
That suit does not detail how Huron River or Norlarco would have been involved, or whether the loans would have been classified as member business loans.
It is unclear if the borrowers involved in any of the suits are members of either credit union.
Alan Theriault, the president and CEO of CU Financial Services, a Portland, Maine, consulting firm that advises credit unions on converting to thrifts, says he expects to see more cases like this.
"This is just the beginning," he said.
Credit unions are struggling with the same pressures facing the banking industry, and they are looking for additional ways to generate income, Mr. Theriault said. "If you can't find the business within your existing field of membership, then you search further."
Julie Kreinbring, the CEO of Huron River, referred all questions to the NCUA. Norlarco's CEO, Bob Hamer, would not discuss the matter.
