For some credit unions and CUSOs, the newly approved changes tothe loan participation rule are apt to leave a bittersweet residuewithin 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 unionsto a single-originator concentration limit of $5 million or 100% ofnet worth, whichever is greater.

The risk-retention requirement for originating federal creditunions will be 10%, as required by the Federal Credit Union Act,the NCUA said.

The risk retention requirement for other originating eligibleorganizations, including federally insured, state-chartered creditunions, will be 5% consistent with the standard for securitizersunder the Dodd-Frank Act unless state law requires a higherpercentage.

The new provisions of the loan participation rule take effect onJuly 25.

Mike Gudely, president/CEO of Innovative Business Solutions, aFort Mill, S.C.-based business lending CUSO, said he hates to seeadditional regulation and another cap, particularly while effortscontinue to increase the member business lending cap.

“However, I understand how the misuse of MBLparticipations, resulting in large dollar losses, sparked thislatest regulatory change,” Gudely acknowledged. “It's a shame forthe majority of credit unions and CUSOs that originateparticipations safely and in a sound manner to be negativelyimpacted by the actions of a few.”

In addition to the new 100% concentration limit, the NCUA alsoapproved a change that allows federally insured credit unions toestablish different underwriting standards for loan participationsthan they use when originating their own loans. Credit unions willalso now have the ability to apply for waivers on certain keyprovisions of the rule.

Gudely said he is pleased the NCUA increased the net worth capbut he is not as optimistic about the big picture.

“I don't see the new rule as a benefit to credit unions, justanother limitation imposed on their MBL activities,” Gudelyoffered. “In the end, credit unions and CUSOs will work throughthis new limitation just as successfully as they have worked withinthe 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 theaverage credit union in their peer group.

“New restrictions on non-credit union originators (such as banksand CUSOs) requires they must have 5% skin in the game,” Antoninisaid. “There were no requirements for them prior to thisrule. Also, the originators have to stay in for the lifeof the loan. This was not clear in the oldrule. I don›t see either of these as particularly bad asit ensures originators will be focused on how the loans willperform.”

Antonini said he still doesn't believe there is evidence thatloan participations are a systemic threat to credit unions and hequestions the need to put restrictions on where they can bepurchased.

“No other financial institution regulator has an issue withthem, and for well-capitalized credit unions who have demonstratedthey can effectively buy loan participations because their netchargeoffs are below average, there should be no restriction,”Antonini suggested.

While the new 100% cap in the revised loan participation ruledoes nothing to mitigate credit risk on a business loan, it doesaddress lead lender risk, said Larry Middleman, president/CEO of CU Business Group LLC, aPortland, Ore.-based business lending and services CUSO that serves426 credit unions in 44 states.

“If a lead lender gets in trouble, whether it be financially orthrough a loss of key personnel or expertise, a participant mayhave more limited exposure to that situation than with no limit onpurchases from any one lead lender,” Middleman said.

Middleman also said he is also pleased to see the NCUA revisethe maximum participation purchases from 25% of net worth from anyone originator to the greater of 100% of net worth or $5million. 

“Ideally a participating credit union will develop a solid,trusting relationship with the lead lender over time,” Middlemanoffered. “The increased cap allows for a better payback on the costof doing proper lead lender due diligence, both at the time ofinitial purchase and throughout the life of the relationship.”

Like most asked, credit union attorney Brian Lauer, a partner with the Messick & Lauer PC inMedia, Pa., can see the benefit of the higher net worth cap butwondered if it even necessary.

“I still believe this limitation is arbitrary and has littleassociation with mitigating loan default risk,” Lauer said. “(It)will put unhealthy pressure on buying credit unions to seek outunknown originating lenders. It will also strain memberrelationships of selling credit unions as they potentially struggleto broaden their network of buyers.”

Lauer said also not to be lost in the headline discussions ofconcentration limitations, is the “great shift” forstate-chartered, federally insured credit unions that must now alsocomply with the entire federal loan participation rule.

Previously, state-chartered credit unions were only required tofollow state regulations which were sometimes vastly different thanthe federal rule, Lauer noted.

“This type of shift can severely hinder growth if the creditunion was not prepared to adjust,” he cautioned.