Credit Unions Beware – the TARP Watchdog Is Ready to Pounce

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Credit unions participating in the Troubled Asset Relief Program (TARP) are now a major blip on the radar screen of the TARP watchdog, the Special Inspector General for TARP (SIGTARP). TARP, often referred to as the "bank bailout," is most remembered for investing over $200 billion of taxpayer money in banks through its Capital Purchase Program (CPP). Less remembered is the Community Development Capital Initiative (CDCI), which provided TARP funds to numerous credit unions and small banks. With the CPP quickly winding down – banks have repaid over 96% of CPP funds, according to Treasury – SIGTARP has turned its attention to the credit unions remaining in the CDCI program. Recent warnings issued by SIGTARP suggest that CDCI credit unions should expect more oversight by Treasury and a visit from SIGTARP agents at the first hint of improper conduct.

Forty-eight credit unions received TARP funds through the CDCI. The purpose of CDCI is to support small business lending in the "hardest-hit" rural and urban areas by making low cost capital available to credit unions and small banks. To date, only eight credit unions have repaid the funds and exited the program. SIGTARP recently commented in its April 30, 2014 Quarterly Report to Congress (April Quarterly Report) that credit unions are likely to remain in CDCI for several more years because (1) the program allows participants to pay Treasury a dividend rate of a mere 2% until 2018 (at which point the dividend rate will spike to 9% and create inherent pressure on institutions to repay TARP) and (2) credit unions continue to face economic challenges that impair their financial stability and ability to repay TARP. With respect to the latter, SIGTARP observed that the capital and balance sheets of credit unions have suffered over the last few years due to increases in loan delinquencies and loan charge-offs and decreases in lending activity. Moreover, credit unions serve the most economically harmed areas around the country that continue to struggle to recover from the financial crisis.

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Topics:  Banks, CDCI, Credit Unions, Inspector General, TARP

Published In: General Business Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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