Updates to a Michigan law now allow credit unions to branch into new services while streamlining their state regulatory burden.
One of the biggest changes made by the law signed this month by Gov. Rick Snyder is the ability for credit unions to offer trust services through a credit union service organization, or CUSO. State-chartered credit unions previously had to contract with an out-of-state CUSO to offer trust services, an option few pursued.
The change opens an additional source of revenue for credit unions that choose to offer trust services and allows them to introduce a new product line to better compete with other financial services providers.
“Not every credit union is going to want to offer that in their service portfolio,” said Ken Ross, chief operating officer for the trade association Michigan Credit Union League. “But long term, having revenue diversity and new products that they can offer members, … it’s incredibly important for us to have those options.”
Other changes made in the update of the Michigan Credit Union Act include:
- Creating the Credit Union Regulatory Fund to ensure that fees charged to credit unions to conduct state exams are not deferred to other areas in the state budget.
- Allowing directors to delegate to the CEO certain routine matters previously only handled by the board.
- Permitting credit unions to offer loan promotions and prize incentives for refinancing loans.
- Reducing the number of required annual board meetings to six.
- Eliminating a three-year cap on prepayment penalties for commercial loans.
By removing the cap on pre-payment penalties, credit unions that do business lending should be able to offer longer fixed-rate loans.
The three-year cap on pre-payment penalties presented a barrier for credit unions to offer longer fixed-rate commercial loans of 10 or 15 years. If, for instance, a borrower paid off the debt early or refinanced it elsewhere, that essentially removed the lender’s margin, regardless of the terms of the loan.
“We want to offer longer-term fixed-rate loans to our members so that they can plan their business needs and expansions and acquisitions and whatever capital needs that they may have,” Kenny Leonard, vice president of commercial loan services at Educational Community Credit Union in Kalamazoo, said during a recent roundtable discussion on credit unions hosted by MiBiz. “But we just couldn’t from a cost-of-funds standpoint if that prepayment penalty was maxed out at three years.
“If I wanted to offer a 10- or 15-year fixed-rate loan, I could still only do a three-year prepayment penalty. Well, that doesn’t allow me to recoup my costs of lending out funds for a 10- to 15-year rate.”
Credit unions in Michigan have been steadily growing their member business loans for a numbers of years. Statewide, business loans to member by credit unions grew 18.1 percent from the first quarter of 2015 to the first quarter of 2016 to about $1.8 billion, according to the Michigan Credit Union League.
Member business loans by credit unions based in the Grand Rapids area grew 38 percent on a year-to-year basis. The MCUL also reported a statewide 8.2-percent increase during the same period in residential mortgages by credit unions and 12-percent growth in new car loans.
This year’s updates mark the first time in 13 years that Michigan lawmakers have updated credit union regulations. As they take effect this September, credit unions will need to decide whether to pursue the opportunities created by the changes, executives said.
“It’s going to take time to implement some of those and do that and to go through the business case analysis to say, ‘Yes, this is what we want to do. Our membership has the need for this,’” said Tim Merwin, the vice president of lending at Kalamazoo-based Advia Credit Union. “(We need) to make sure that — operationally and strategically — we understand the value we can provide by entering into that.”
Sidebar: A pair of CUs rebrand
Two credit unions in West Michigan have adopted new names as part of their broader growth strategies.
The former Option 1 Credit Union in Grand Rapids earlier this month became Adventure Credit Union, while Kellogg Community Credit Union dropped the “federal” from its name after securing regulatory approval to convert from a federal charter to a state charter.
With the name and charter change, the Battle Creek-based Kellogg Community Credit Union expanded its field of membership to 15 counties. The credit union also said it plans to enter the Grand Rapids-area market.
“Moving to a state charter provides us with an opportunity for future long-term growth for many more years to come,” CEO Tracy Miller said in a statement.
Kellogg Community Credit Union had 34,057 members and assets of $476.1 million at the end of the first quarter. It operates 10 offices in the Battle Creek and Kalamazoo areas.
At Adventure Credit Union, the name change took effect June 6.
“Adventure is a name full of energy and optimism. It reflects our spirit of doing business and connects us to our Midwestern roots,” President and CEO Steve Bush wrote to members via a letter posted on the credit union’s website.
Adventure Credit Union, with nine offices in Kent and Ottawa counties, had 28,396 members and assets of $297.4 million at the end of the first quarter.