Final Loan Participation Rule Has Little to Do With Mitigating Default Risk: Attorney
Now that the NCUA has approved a final loan participation rule, some are still concerned about the long-term impact of some of the provisions.
“While I am happy to see that the NCUA raised the limit to 100% of net worth from the proposed 25% of net worth, I still believe this limitation is arbitrary and has little association with mitigating loan default risk,” said Brian Lauer, a partner with the Messick & Lauer law firm in Media, Pa.
Lauer, who specializes in representing credit unions and CUSOs, said the net worth increase “will put unhealthy pressure on buying credit unions to seek out unknown originating lenders. It will also strain member relationships of selling credit unions as they potentially struggle to broaden their network of buyers.”
In addition to raising the net worth limit, the NCUA Board on Thursday approved a risk retention requirement for originating federal credit unions at 10%, as required by the Federal Credit Union Act.
The risk retention requirement for other originating eligible organizations including federally insured, state-chartered credit unions, will be 5%, which is consistent with the standard for securitizers under the Dodd-Frank Act unless state law requires a higher percentage, the NCUA Board said.
“It was nice to see that the NCUA acknowledged that CUSOs are separate entities and therefore loans originated by a CUSO will not be attributed to its owners for purposes of determining the single originator concentration limit,” Lauer said.
He added, “CUSOs have been a powerful tool for credit unions to aggregate lending services through collaboration and this rule may have dramatically hindered that avenue for credit union growth.”
Lauer said also not to be lost in the headline discussions of concentration limitations, is the “great shift” for state-chartered federally insured credit unions that must now also comply with the entire federal loan participation rule.
Previously, state-chartered credit unions were only required to follow state regulations which were sometimes vastly different than the federal rule, Lauer noted.
“This type of shift can severely hinder growth if the credit union was not prepared to adjust,” he cautioned.
Still, Lauer is optimistic about working within the parameters of the final loan participation rule
“As usual, we will work through this regulatory change and the current regulatory climate to help credit unions continue to grow. With adversity comes opportunity,” he offered.