Options Still Few for Credit Unions Pushing Up Against 12.25% MBL Cap

SAN DIEGO — It’s been a little over a year since USA Federal Credit Union launched its business services division, but an even earlier entry into loan participations set the foundation for any navigating it would have to do to stay under the 12.25% member business lending cap.

For credit unions with high business lending activity that are pushing close to the regulatory threshold, options to stay in compliance are few with loan participations leading the pack. A typical loan participation transaction that credit unions enter into is where the originating credit union sells a 90% participation in its loans and retains the servicing rights as well as a 10% interest in the loans. All the rights to the underlying loans are consistent with the ownership percentages of 90% and 10%. However, the originating credit union may retain a small subordinated interest, generally 5%, in the pool of loans against which losses are initially allocated and will provide reserves for the expected losses, which is usually significantly less than the limited subordination.