CUs and Banks Hook Up on the Hush Hush for Loan Participations
That has certainly been the case in the loan participation arena. No one is quite sure how many arrangements are currently in place, but there are a few credit unions that have linked up with banks to buy and sell pieces of participation loans from each other. It's permissible under NCUA's rules and regulations for an FCU to "participate in making loans with eligible organizations," which includes any federally chartered or federally insured financial institution, according to NCUA.
The caveat is the regulation limits participating FCU lenders that are not the originating lender to, among other things, participating only in "loans it is empowered to grant and loans to its own members or members of another participating credit union," NCUA emphasized. Even if all legal requirements are met, loan participation programs are still subject to safety and soundness review by NCUA examiners.
"It's rare in the industry," said Grace Mayo, president/CEO of $597 million Telesis Community CU. Telesis launched Business Partners LLC, a business lending CUSO with more than $1.5 billion in business loans under asset management. "There are very few credit unions that are doing this and the ones that are, have longstanding relationships with the banks."
Mayo said community banks are more likely to approach Business Partners for underwriting and audit services. Those that sought out participation loan transactions were not too enthused after seeing the rates involved.
"It seems like the rates aren't high enough for them. We haven't closed any deals," Mayo said. "We're open to deals but only if we participate out to them. We don't think our credit union clients would like for it to go the other way."
Generally, loan participations give credit unions the latitude to engage in larger than usual commercial loans and at the same time share the risks among all parties involved. Credit unions can buy up to a 90% participation in nonmember loans that were originated by other credit unions. The originating credit union is required to retain at least 10% of the loan. Buyers and sellers follow strict, regulatory guidelines within the transaction, including executing a master agreement before the deal takes place and using the same underwriting criteria for retained loans.
"Some of the very active business lending CUSOs that have credit unions running up against the cap may consider participating with commercial banks," said Larry Middleman, president/CEO of CU Business Group, which serves more than 250 credit unions. "You can probably count on one hand the number of credit unions that are doing this."
CU Business Group has had a few credit union-bank loan participation deals in the past, Middleman said. Banks are required to keep loans to any one borrower below 15% of net worth. Middleman recalled what he described as a successful transaction between a credit union and a local bank. In the end, the regulator told the credit union to divest the loans.
"NCUA says it's permissible as long as it's a federally insured institution," Middleman said. "It's a real red flag for the state regulators. You have to make absolutely sure that [the transaction] is going to fly with your regulator."
Ensuring the proper protocols are followed and having a strong, long-term relationship with the bank may provide some peace of mind. Middleman said in the few instances that CU Business Group has worked with banks, it was the well-known one "literally across the street" where the credit union CEO knew the key executives there.
Knowing the bank and its senior management staff is such a critical step in the process for CU Business Capital that requests from unfamiliar banks are often shunned, said Bert Bryan, president/CEO.
"Most of our team are former bankers, and we came in with relationships that we previously had," Bryan said. "You have to know who you're dealing with. It has to go much deeper than someone you met at a conference. It can't be someone showing up and saying, 'I'm with a bank in another part of the country or the world.'"
Over the past few years, CUBC has done roughly 10 participation loans with community and regional banks of various asset sizes, Bryan said. The majority of those were prior relationships. In one transaction, the bank was over its limit for a particular borrower. The employee worked at the bank for 20 years before coming to work at CUBC. Not only did the transaction run smoothly, the borrower ended up joining the credit union involved in the deal and financed a facility in the area where that same credit union was expanding. The borrower's company also became a select employee group.
"So, we got a piece of the participation, and we built more relationships," Bryan said.
Given the sharing atmosphere common within the credit union movement, some might be legitimately concerned about a bank stealing relationships away. Bryan said CUBC takes a hard look at what's really at stake.
"If we can't do the deal, we may lose the SEG. They may end up taking the relationship and everything else to the bank," Bryan said. "To the critics who say, 'Let's keep it in credit union land'--no man's an island."
Middleman said there is room for credit union-bank alliances especially for those credit unions that are doing the $10 million to $20 million deals.
"The good thing about participating outside of credit unions is banks have done [the loans] forever. They should have the good expertise upfront," Middleman said, acknowledging "some of the industry may be opposed to [the deals]."