For some credit unions and CUSOs, the newly approved changes to the loan participation rule are apt to leave a bittersweet residue within their business loan portfolios.
More than a week after the NCUA Board outlined the revisions, the reaction has been fairly mixed.
Among the new provisions are subjecting purchasing credit unions to a single-originator concentration limit of $5 million or 100% of net worth, whichever is greater.
The risk-retention requirement for originating federal credit unions will be 10%, as required by the Federal Credit Union Act, the NCUA said.
The risk retention requirement for other originating eligible organizations, including federally insured, state-chartered credit unions, will be 5% consistent with the standard for securitizers under the Dodd-Frank Act unless state law requires a higher percentage.
The new provisions of the loan participation rule take effect on July 25.
Mike Gudely, president/CEO of Innovative Business Solutions, a Fort Mill, S.C.-based business lending CUSO, said he hates to see additional regulation and another cap, particularly while efforts continue to increase the member business lending cap.
“However, I understand how the misuse of MBL participations, resulting in large dollar losses, sparked this latest regulatory change,” Gudely acknowledged. “It’s a shame for the majority of credit unions and CUSOs that originate participations safely and in a sound manner to be negatively impacted by the actions of a few.”
In addition to the new 100% concentration limit, the NCUA also approved a change that allows federally insured credit unions to establish different underwriting standards for loan participations than they use when originating their own loans. Credit unions will also now have the ability to apply for waivers on certain key provisions of the rule.
Gudely said he is pleased the NCUA increased the net worth cap but he is not as optimistic about the big picture.
“I don’t see the new rule as a benefit to credit unions, just another limitation imposed on their MBL activities,” Gudely offered. “In the end, credit unions and CUSOs will work through this new limitation just as successfully as they have worked within the framework of the MBL cap.”
Jack Antonini, president/CEO of the National Association of Credit Union Service Organizations, said while the 100% of net worth increase is a much better measure, he would like to see an analysis of what this will mean for the average credit union in their peer group.
“New restrictions on non-credit union originators (such as banks and CUSOs) requires they must have 5% skin in the game,” Antonini said. “There were no requirements for them prior to this rule. Also, the originators have to stay in for the life of the loan. This was not clear in the old rule. I don›t see either of these as particularly bad as it ensures originators will be focused on how the loans will perform.”
Antonini said he still doesn’t believe there is evidence that loan participations are a systemic threat to credit unions and he questions the need to put restrictions on where they can be purchased.
“No other financial institution regulator has an issue with them, and for well-capitalized credit unions who have demonstrated they can effectively buy loan participations because their net chargeoffs are below average, there should be no restriction,” Antonini suggested.
While the new 100% cap in the revised loan participation rule does nothing to mitigate credit risk on a business loan, it does address lead lender risk, said Larry Middleman, president/CEO of CU Business Group LLC, a Portland, Ore.-based business lending and services CUSO that serves 426 credit unions in 44 states.
“If a lead lender gets in trouble, whether it be financially or through a loss of key personnel or expertise, a participant may have more limited exposure to that situation than with no limit on purchases from any one lead lender,” Middleman said.
Middleman also said he is also pleased to see the NCUA revise the maximum participation purchases from 25% of net worth from any one originator to the greater of 100% of net worth or $5 million.
“Ideally a participating credit union will develop a solid, trusting relationship with the lead lender over time,” Middleman offered. “The increased cap allows for a better payback on the cost of doing proper lead lender due diligence, both at the time of initial purchase and throughout the life of the relationship.”
Like most asked, credit union attorney Brian Lauer, a partner with the Messick & Lauer PC in Media, Pa., can see the benefit of the higher net worth cap but wondered if it even necessary.
“I still believe this limitation is arbitrary and has little association with mitigating loan default risk,” Lauer said. “(It) 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.”
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.