ALEXANDRIA, Va.- To guide credit unions through third-party, indirect lending, the NCUA Board at its Dec. 15 meeting voted unanimously to release a notice of proposed rulemaking seeking comment on the regulation of credit union purchases of indirect third-party lending. The notice indicates that NCUA would like to limit the total loan amount that credit unions can purchase under these programs to 50% of the credit union's net worth for the first 30 months of the relationship with the third party. After that initial period, the limit would increase to 100%. "The Board believes that limits of 50 percent and 100 percent are appropriate, assuming credit unions maintain an adequate due diligence program," the board action memorandum (BAM) read. The notice said the agency would permit waivers for credit unions "that can demonstrate appropriate initial and ongoing due diligence." However, the agency warned it would keep an eye on any credit unions making large purchases running up to the effective date of a final rule. Additionally, credit unions already exceeding these caps would be grandfathered in though they could not take on additional participations until the ratios dropped. The agency acknowledged the potential membership and lending growth benefits to credit unions and the significant increase in activity of late, but made its specific concerns clear in the BAM. "The indirect lending aspect of these programs creates additional loss of control for the credit union, as member-borrower information does not come directly to the credit union but instead is filtered through both the dealer and the vendor," it read. "In some of these programs, the third-party also controls the quality of the loan receivables because it dictates the underwriting criteria and processes the loan applications. In addition, some third-party vendors control the insurance coverage associated with these loans. The third-party may even assume some of the credit risk through reinsurance arrangements or stop-loss agreements. All these factors increase a credit union's reliance on the third-party to produce a positive return for the credit union. Some vendors have advertised these programs in the past by promoting them as "turn-key" and suggesting that credit unions need do very little in the way of due diligence." The agency said it is also concerned that some credit unions, despite NCUA guidance, are not exercising proper due diligence. "In fact, some credit unions with significant concentrations in indirect, outsourced loans have indicated to NCUA their desire to fund new loans even though they have not yet completed the due diligence described in NCUA issuances," according to the BAM. Centrix Financial Executive Vice President Geoff Bacino said the proposal is a good one. "I think it starts to identify some parameters and guidelines," he commented. The benchmarks seem reasonable, he added, noting that only about 20 credit unions are over 100% of net worth right now. "It's something that we're comfortable with and that our clients are comfortable with," Bacino said. Now, the agency just needs to lift the documents halting a number of credit unions from participating to show that they can in fact handle it, he added. The notice has a 60-day public comment period. The NCUA Board also voted 3-0 to revise its member business lending rule to clarify that NCUA's business lending rule does apply for corporate credit unions making unsecured business loans to borrowers other than member credit unions or corporate CUSOs. When making these loans, the corporate must comply with NCUA's business loan collateral and security requirements. The final rule also amends the definition of a construction or development (C&D) loan to include loans to borrowers who already own or have rights to the property. The proposal as written was amended because it could capture more routine, less risky loans. NCUA explained that it intended to include loans to build on already acquired land but not something less risky, like a repair to a barn roof on a pre-existing farm; that is a regular member business loan. The definition of net worth was changed for consistency with the Federal Credit Union Act and NCUA's prompt corrective action rule. The new rule also clarified that states do not need NCUA's approval to rescind a state member business lending rule. Though many commenters encouraged the agency to approve credit unions to get involved in all government-backed programs, NCUA said it was not yet comfortable with the idea but is keeping it in mind. The final rule becomes effective in 30 days. NCUA also issued a final rule clarifying that the purchase of assets and assumption of liabilities between federally insured credit unions does not require prior approval from the NCUA Board. However, there is one narrow exception to this for federally insured state chartered credit unions applying to the purchase of loans from CUSOs. The rule takes affect 30 days after publication in the Federal Register. Finally, NCUA approved an operating level for the National Credit Union Share Insurance Fund of 1.3%. -

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