CU Loan Source (CULS) is a unique loan participation model that originates and services prime fixed-rate auto loans from franchise dealerships in 10 states.
CULS pools the loans monthly to create a deal flow to credit unions who purchase participations from $250,000 to more than $20 million per month. Each investing credit union owns a portion of every loan in the pool and, therefore, shares in the risk and rewards of each loan.
CUNA News recently asked CULS how it works with credit unions.
CUNA News: How has this helped credit unions?
The company was founded in 2004 by three Georgia credit unions and the Georgia Credit Union League service organization to provide assets to credit unions with loan-to-share challenges. To date, CULS has originated more than 200,000 loans in excess of $5 billion, helping 25 credit unions improve returns to their members.
In 2017, working with Illinois Credit Union League, CULS expanded this program to include Illinois credit unions. As of April 2018, we’ve had nine Illinois credit union participants enter the program, and we are helping more credit unions work through the approval process.
CUNA News: What impact has this program had on credit unions with high liquidity, and those with low liquidity?
Credit unions of all sizes have entered the program to improve profitability and increase loan-to-share ratios. High-liquidity credit unions have benefited from putting their capital to work while not compromising profitability. Low-liquidity credit unions can also profit from the program, as investment size can be scaled to meet the individual needs of each credit union.
Credit unions can start small and increase monthly participation amounts as additional funds become available. Our program provides short-term assets, allowing credit unions to re-invest in higher-yielding assets in this rising-rate environment.
CUNA News: Are liquidity challenges growing now?
Liquidity will always be a challenge for many credit unions, and not in the way you would normally think.
Due to field-of-membership limitations, some credit unions have difficulty increasing their loan-to-share ratios and putting high volumes of cash to work for their members. Our program allows them to benefit from geographical and product diversification, reducing their reliance on their members as a profit source.
CUNA News: What’s the revenue opportunity?
CULS yields are just above 400 basis points (bp) for the current April pool. First-quarter net yield was 160 bp during the three-year agency rate.
We target a net yield of 150 bp during the three-year agency rate. Our purchase cycle is structured such that as rates continue to rise, our participants benefit from current market rates as opposed to assets originated months prior, such as when purchasing a static pool.
CUNA News: Are there any challenges with this effort?
Once the credit union has received NCUA and state regulatory approval, the program is turnkey. CULS provides the necessary reporting and due diligence support to book accounting entries.
CUNA News: What advice would you offer credit unions about making this work?
Currently, the CULS program is approved for state-chartered credit unions in Georgia and Illinois. Several other states have laws favorable to loan participation programs similar to ours. We are in talks with a number of those states now.
The best advice we can give to a credit union that wants to participate is to have a goal in mind. Whether it’s portfolio size, return on asset, or improving loan-to-share, we are in the best position to help when we know what our partners want to achieve.
CUNA News: Any other advice on managing liquidity?
Don’t assume that you can fix liquidity issues organically. Take advantage of investment opportunities available in the market, especially those that are flexible enough work in tandem with your member loan program.
Build lasting partnerships that will compliment your overall growth and liquidity strategies.