With the effective date of the revised loan participation rule less than one week away, credit unions and CUSOs have taken another look at their lending programs to see if any adjustments need to be made.
At its June 20 meeting, the NCUA Board approved several revisions to the rule, including limiting purchasing credit unions to a single-originator concentration of $5 million or 100% of net worth, whichever is greater.
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.
The initial effective date for the newly revamped loan participation rule was July 25. However, on July 3, the NCUA said it would extend the compliance deadline to Sept. 23 because some federally insured credit unions faced difficulties meeting the original deadline.
The $2.7 billion Catalyst Corporate Credit Union in Plano, Texas, recently launched its own loan participation program, taking on the role as the facilitator that brings buyers and sellers together.
The corporate doesn’t participate in the actual transaction. Instead, it said it outlines the offer for sale, locates buyers, and gathers and provides due diligence information on a secure website for buyers to review. Catalyst Corporate then coordinates the processing of documents between sellers and buyers, processes the settlement transaction and provides monthly reporting and remittance services.
Jeff Hamilton, vice president of lending at Catalyst Corporate, said in his talks with credit unions, he’s heard that people are pleased with the final loan participation rule, particularly the single-originator concentration limit of $5 million or 100% of net worth requirement.
“I don’t think the credit unions I’ve been in contact with believe the changes are onerous,” Hamilton said, who recently gave a presentation on loan participations at the Cornerstone Credit Union League’s conference in San Antonio. “They’re clearly defined. It helps delineate the responsibilities and duties.”
Hamilton said the loan participation market is sort of fragmented with credit unions and broker-dealers having their own networks that they’ve dealt with for years. The revised rule may offer some new considerations.
“There’s been some talk out there in the industry that the rule may be limiting for people. (With the revised rule), people are looking for ways to expand their networks,” Hamilton offered.
Next Page: A Draft Outline
Credit unions who say they are interested in loan participationsare provided with a draft outline. Since its debut earlier this year, Hamilton said there has been strong interest in Catalyst Corporate’s loan participation facilitation program, especially on the buyer’s side, due in large part to credit unions having excess liquidity.
Diversification is key for clients of Willow Capital Group, a Centerbrook, Conn.-based firm that provides commercial loan origination, underwriting and closing for more than 30 credit unions managing a servicing portfolio of nearly $350 million. William McCluskey, CEO of the firm, said in preparation for the Sept. 23 effective date, the company evaluated all lead lender concentration limits.
“Our evaluation found no one has any significant or material concentration with one lender,” McCluskey said. “We try to get our lenders diversified. At this point, we’re in good shape.”
Of all the revised provisions, McCluskey said he especially favors some control on the lead lender’s exposure. His reasoning is led by what has occurred over the last several years when loan participants were overexposed because they didn’t have the necessary due diligence and factual support. Many lead lenders were participating but weren’t aware of over-exposure, he pointed out.
“I feel the spirit of the regulation taps into due diligence. With a lot of CUSOs, there’s a very closed field. That can run the risk of over-exposure,” McCluskey explained.
Several high-profile credit unions that failed primarily due to loan participations were selling down to 1% and charging a 2% servicing fee, which eliminated risk for them, McCluskey said.
Still, he emphasized that new participants must do their due diligence.
“A lot of them don’t feel they have the ability to do it, but in terms of running a good participation program, they need to know that their lending group knows what they’re doing,” McCluskey said.
The $626 million Amplify Credit Union in Austin, Texas, will have a broader pool of people to participate with it as a result of the revised loan participation rule, said Paul Trylko, president/CEO. Because the credit union has some wiggle room beneath its member business lending cap, he said it hasn’t had to make any adjustments to comply with the revised rule.
“It’s going to bring more people together, whether it’s on the buy or the sell side,” Trylko said. “We have a little bit of room under the cap to plan for that. “With some of the caps, we’re in good shape right now. That’s why we’re looking outside.”
Amplify became more engaged in business lending in 2005 when it became one of seven co-owners of CU Business Solutions LLC, an Austin, Texas-based CUSO, Trylko said. The credit union’s member business lending portfolio has grown over the years and now encompasses 243 loans totaling $54.9 million as of June 30, according to Amplify-provided data. The credit union has purchased $9.2 million in participation loans and sold $2.9 million.
Trylko, who has spoken out in support of raising the MBL cap from its current 12.25% of assets to 27.5%, said Amplify is looking for ways to help more of its business members.
“We’re at 70% to 80% of the cap. We’d like to do more business loans. As the market gets stronger, we want to be able to do that. But you have to manage the cap by utilizing participations,” Trylko said.