Compliance Question of the Week

What is a business development company, and can a credit union invest in one?

A business development company (BDC) is an organization regulated by the Washington Department of Financial Institutions (DFI) Division of Banking and chartered for the purpose of promoting small business or small agriculture or improving the economy of a community within the state. Until major changes to the Washington BDC charter in 2006, credit unions could not participate equally in a BDC.

A BDC is almost entirely business plan-driven, and there are few restrictions. The business plan, capitalization, management and operations of the BDC must simply make sense for that type of organization and purpose.

A BDC can be formed as a corporation (either “C” or “S”), or as a limited liability company. It may not accept deposits, must maintain a capital to asset ratio of at least eight percent, and cannot exceed a loan to one borrower limit of 25 percent.

Each BDC must be comprised of at least five members, three of whom must be depository institutions. There is no restriction on other types of members in the BDC, nor are there any minimum capital contribution requirements.

BDCs are not subject to any business lending or investment caps, but credit unions participating in BDC loans would need to count their share of loans made toward their own member business lending (MBL) cap and might need to add additional reserves depending on what the BDC is organized to do.

In order to invest in a BDC, a state chartered credit union must first obtain approval from the DFI Division of Credit Unions in Washington or the Department of Consumer and Business Services (DCBS) in Oregon, because a BDC is not a pre-approved, statutory investment. A federally chartered credit union’s ability to invest in a BDC probably depends on the purpose of the BDC and on whether the credit union can qualify the investment under the National Credit Union Administration’s (NCUA’s) investment pilot program.

Related Links

Business Development Company Act of 2006
RCW 31.24
RCW 31.12.436
12 CFR 703

 

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance.