ALEXANDRIA, Va. —The NCUA Board approved a final loan participation rule on Thursday that puts new limits andretention requirements on credit unions that purchase theloans.

Chairman Debbie Matz said during the regulator's monthly boardmeeting at its Alexandria, Va., headquarters that the rule aims tominimize losses without discouraging participation loan purchasesor increasing regulatory burden.

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A concentration limit in the proposed rule that would have cappedparticipations from a single originator to just 25% of net worthwas relaxed in the final rule to 100% of net worth or $5 million,whichever is greater. Matz said that provision was most oftenaddressed in comment letters, and the agency “heard loud and clear”that it would restrict participation purchases, especially forsmall credit unions.

Additionally, the final rule will require originating lendersthat are federal credit unions to retain at least 10% of the loan,as required by the Federal Credit Union Act. State-chartered creditunions, CUSOs and banks that originate participation loans mustretain 5% of the loan, which Matz said is consistent with theDodd-Frank Act.

The rule will also require a written loan participationagreement between originators and borrowers. Director ofSupervision Matt Biliouris told the board that NCUA examiners willreview the agreements during examinations, and will put an emphasison adequate documentation and due diligence.

Purchasing credit unions must also develop a loan participationpolicy that includes concentration limits, including the cap onloans from a single originator as well as self-imposed limits onloan types and single borrowers. However, both the singleoriginator cap and limit on single borrowers are open towaivers.

The policy must also establish underwriting standards, but willallow federally insured credit unions to participate in types ofloans it does not originate. Different, and when appropriate, lessstringent underwriting standards than what credit unions use whenoriginating their own loans can be included in the policy,according to documentation provided by the NCUA at the boardmeeting. If a federally insured credit union both originates andpurchases loans, it may establish different underwriting standardsfor each activity.

Biliouris said his Office of Examination and Insurance willissue guidance for credit unions that will outline supervisoryexpectations for the rule and provide best practices for developingpolicies and agreements.

The rule also requires originators to participate in thetransaction for the life of the loan, and restricts federallyinsured credit unions to participations in which the borrower isalready a member of a participating credit union at the time of thepurchase.

The rule will be effective 30 days after it is published in theFederal Register; Staff Attorney Pamela Yu told the board sheestimates the effective date will be around August 1.

Matz said the rule was necessary because of increasedparticipation activity in the last five years. Since December 2007,she said, credit unions have seen a 40% increase in the dollarvalue of participations kept on their books; however, during thesame period, participation charge offs have increased by 160%.

Representatives from both NAFCU and CUNA said they were pleasedwith the changes the NCUA made to the final rule; in particular,the single originator cap increase and flexibility for waivers.However, NAFCU President/CEO Fred Becker said in a preparedstatement that his trade association believes the rule isunnecessary and would not justify compliance costs.

“We will scrutinize this complex rule and work with our membersto determine where and how it may be improved and, if necessary,recommend revisiting the rule,” Becker said.

The board also approved a member business loan rule forstate-chartered credit unions in Illinois that differs from theNCUA's rule. Region IV Director Keith Morton told the board therule is more conservative than the NCUA rule because it limits MBLactivity to credit unions with more than $30 million in assets, andeliminates the appeals process for credit unions that have had rulewaiver requests denied. Illinois is the seventh state to establishMBL rules that differ from NCUA rules.

The other six states are Washington, Oregon, Texas, Wisconsin,Connecticut and Maryland, Morton said.