Federally insured, state-chartered credit unions have consistently reported higher rates of delinquencies and charge-offs on loan participations.
The NCUA pointed that out in December after releasing a proposal that would extend what it calls are protections on loan participations to all federally insured credit unions.
The distinction is notable given the recent takeover of the $318 million Telesis Community Credit Union, which experienced financial troubles based in large part to its business lending and loan participation activities.
According to NCUA June 2011 Call Report data, 1,401 federally insured credit unions held over $12.4 billion worth of outstanding loan participations. Since 2007, loan participation balances have grown significantly – up 28% over the last four years.
Federally insured, state-chartered credit unions represented 68% of all participations sold and 55% of participations bought, the NCUA said.
At the time of the proposal release, NCUA Chairman Debbie Matz said loan participations are a valuable tool for credit unions to diversify loan portfolios, improve earnings and manage their balance sheets.
“However, loan participations have the potential to create systemic risk,” Matz said at the time. “Large volumes of participated loans tied to a single originator, borrower, or industry – or serviced by a single entity – have the potential to impact multiple credit unions if problems occur.”
Under the NCUA’s loan participation proposal, originators would be required to retain 10% of the original loan risk. Federal credit unions are already subject to this requirement.
Loan participations purchased from one originating lender could not exceed 25% of net worth. Participation loans to one borrower could not exceed 15% of net worth. Credit unions could apply to the NCUA’s regional directors for waivers of these limits.