NEWPORT BEACH, Calif. - As more credit unions get involved inloan participations to manage the 12.25% member business lendingcap, NCUA is quite aware of one possible loophole. A credit unioncan not exceed its aggregate loan cap for loans made to its membersbut if its aggregate loan cap would be exceeded by the sum of theoutstanding balances of member loans, participation interestspurchased and non-member loans purchased, it can apply to the NCUAregional director for permission to exceed the cap, said GuyMessick, legal counsel for NACUSO. "NCUA understands that creditunions could play games to avoid the aggregate loan cap for memberloans by trading loans back and forth," Messick said. "(That's) thereason why the application for approval to exceed the cap includesa certification that the non-member loans and loan participationsare not being used in conjunction with one or more other creditunions that are trading loans solely for the purpose of avoidingthe cap." In business lending, loan participations are also used tomanage the Credit Union Membership Access Act's aggregate businessloan cap, which is 12.25% of total assets. In the proposedamendments, NCUA was not going to count participation interests inbusiness loans in calculating the aggregate cap, Messick said. Inthe final version of the Act's amendments, loan participations inbusiness loans are counted toward the purchasing credit union'saggregate loan cap. As for the originating credit union, the amountof the loan participation sold is removed from the amount countedtoward the originating credit union's aggregate loan cap as long asthe participation interest is sold without recourse. The risk ofrepayment is shared by all participants in proportion to theirparticipation interests, Messick reiterated. For example, Messicksaid if a credit union has a $100,000 business loan to its memberand sells 50% of the loan to another credit union, each creditunion counts $50,000 toward their respective aggregate loan cap.This amount is reduced as the loan is paid down. "Note that acredit union that qualifies for Reg Flex status can buy thebusiness loan of another credit union outright," Messick said."They can buy the whole loan made by another credit union to itsmember. This would be a non-member loan to the purchasing creditunion." NCUA is drawing a distinction between member loans on onehand and participation interests and non-member loans on the otherhand, as the language of the Act only restricts the credit union'sability to lend to its members, Messick explained. In the end, loanparticipations are "very valuable tools" because they can be usedto allocate risk among two or more credit unions and originatingcredit unions use them to generate liquidity. Purchasing creditunions can also use loan participations in lieu of purchasinginvestments with their excess cash. NCUA's passage of the MemberBusiness Lending Regulation opened the doors for credit unions andCUSOs to expand business services. Messick lists a number ofreasons why a credit union would run a business loan through itsCUSO including having the ability to serve non-members. "Keep inmind that CUSOs still have to primarily serve members of theaffiliated credit unions," Messick said. "A CUSO has the ability tohave a minority of its business loans with non-members." Goingthrough a CUSO means there are no restrictions on the type ornumber of loans because they are "not confined" by CUMAAlimitations or NCUA's rules and regulations. "If the credit unionis in danger of exceeding its regulatory limit, the CUSO can be thelender," Messick pointed out. Other justifications for offering abusiness loan through a CUSO are the ability to manage regulatoryrisk. If a credit union had a non-conforming loan or a loan thathad a higher risk factor than the credit union is comfortable with,it could place that loan in its CUSO, Messick said. "Another loanmight have financial ratios that are not within the credit union'spolices but the loan risk is reasonable. In that case, the CUSOcould take the loan," Messick said. Credit unions could also raiseoutside capital by running business loans through a CUSO by sellinga portion of the CUSO to other credit unions or to non-credit unioninvestors. If there is strong demand for loans, more members willbe able to be served at a lower cost of funds than if the fundswere borrowed by the credit union, Messick explained. -

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