With the effective date of the revised loanparticipation rule less than one week away, credit unions and CUSOshave taken another look at their lending programs to see if anyadjustments need to be made.

At its June 20 meeting, the NCUA Board approved several revisions to the rule, includinglimiting purchasing credit unions to a single-originatorconcentration of $5 million or 100% of net worth, whichever isgreater.

The NCUA also approved a change that allows federally insuredcredit unions to establish different underwriting standards forloan participations than they use when originating their own loans.Credit unions will also now have the ability to apply for waiverson certain key provisions of the rule.

The initial effective date for the newly revamped loanparticipation rule was July 25. However, on July 3, the NCUA saidit would extend the compliance deadline to Sept. 23 because somefederally insured credit unions faced difficulties meeting theoriginal deadline.

The $2.7 billion Catalyst Corporate Credit Union in Plano, Texas, recentlylaunched its own loan participation program, taking on the role asthe facilitator that brings buyers and sellerstogether. 

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 securewebsite for buyers to review. Catalyst Corporate then coordinatesthe processing of documents between sellers and buyers, processesthe settlement transaction and provides monthly reporting andremittance services.

Jeff Hamilton, vice president of lending at Catalyst Corporate,said in his talks with credit unions, he's heard that people arepleased with the final loan participation rule, particularly thesingle-originator concentration limit of $5 million or 100% of networth requirement.

“I don't think the credit unions I've been in contact withbelieve the changes are onerous,” Hamilton said, who recently gavea presentation on loan participations at the Cornerstone CreditUnion 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 offragmented with credit unions and broker-dealers having their ownnetworks that they've dealt with for years. The revised rule mayoffer some new considerations.

“There's been some talk out there in the industry that the rulemay be limiting for people. (With the revised rule), people arelooking for ways to expand their networks,” Hamiltonoffered. 

Credit unions who say they are interested in loanparticipationsare provided with a draft outline. Since its debutearlier this year, Hamilton said there has been strong interest inCatalyst Corporate's loan participation facilitation program,especially on the buyer's side, due in large part to credit unionshaving excess liquidity.  

Diversification is key for clients of Willow Capital Group, a Centerbrook, Conn.-based firm thatprovides commercial loan origination, underwriting and closing formore than 30 credit unions managing a servicing portfolio of nearly$350 million. William McCluskey, CEO of the firm, said inpreparation for the Sept. 23 effective date, the company evaluatedall lead lender concentration limits. 

Next Page: Material Concentration

“Our evaluation found no one has any significant or materialconcentration with one lender,” McCluskey said. “We try to get ourlenders diversified. At this point, we're in good shape.”

Of all the revised provisions, McCluskey said he especiallyfavors some control on the lead lender's exposure. His reasoning isled by what has occurred over the last several years when loanparticipants were overexposed because they didn't have thenecessary due diligence and factual support. Many lead lenders wereparticipating but weren't aware of over-exposure, he pointedout. 

“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 therisk of over-exposure,” McCluskey explained.  

Several high-profile credit unions that failed primarily due toloan participations were selling down to 1% and charging a 2%servicing fee, which eliminated risk for them, McCluskeysaid. 

Still, he emphasized that new participants must do their duediligence.

“A lot of them don't feel they have the ability to do it, but interms of running a good participation program, they need to knowthat their lending group knows what they're doing,” McCluskeysaid. 

The $626 million Amplify Credit Union in Austin, Texas, willhave a broader pool of people to participate with it as a result ofthe revised loan participation rule, said Paul Trylko, president/CEO. Because the credit union has somewiggle room beneath its member business lending cap, he said ithasn't had to make any adjustments to comply with the revisedrule.

“It's going to bring more people together, whether it's on thebuy or the sell side,” Trylko said. “We have a little bit of roomunder the cap to plan for that. “With some of the caps, we're ingood shape right now. That's why we're lookingoutside.” 

Amplify became more engaged in business lending in 2005 when itbecame one of seven co-owners of CU Business Solutions LLC, anAustin, Texas-based CUSO, Trylko said. The credit union's memberbusiness lending portfolio has grown over the years and nowencompasses 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%, saidAmplify is looking for ways to help more of its businessmembers.

“We're at 70% to 80% of the cap. We'd like to do more businessloans. As the market gets stronger, we want to be able to do that.But you have to manage the cap by utilizing participations,” Trylkosaid.