Eighteen months after it proposed a controversial loan participation rule that would have capped purchases from single originators to just 25% of net worth, the NCUA Board approved a final rule June 20 that significantly relaxed the provision.
That concentration limit was increased significantly in the final rule, to 100% of net worth or $5 million, whichever is greater.
“We heard loud and clear that the proposed concentration limit of 25% of net worth from a single originator was too low,” Chairman Debbie Matz said during the meeting at the NCUA’s Alexandria, Va. headquarters. “It would have had the unintended consequence of restricting small credit unions that need to diversify from purchasing participations.”
In developing the final rule, Matz said the regulator met with credit union officials and trade organizations and also established a working group composed of officials with loan participation experience and NCUA staff. She said the industry representatives helped ensure the final rule would be “workable in the real world, by maintaining a healthy marketplace.”
Additionally, the final rule will require originating lenders that are federal credit unions to retain at least 10% of the loan, as required by the Federal Credit Union Act. State-chartered credit unions, CUSOs and banks that originate participation loans must retain 5% of the loan, which Matz said is consistent with the Dodd-Frank Act.
The rule will also require a written loan participation agreement between originators and borrowers. Director of Supervision Matt Biliouris told the board NCUA examiners will review the agreements during examinations and will put an emphasis on adequate documentation and due diligence.
Purchasing credit unions must develop a loan participation policy that includes concentration limits, including the cap on loans from a single originator as well as self-imposed limits on loan types and single borrowers. However, both the single originator cap and limit on single borrowers are open to waivers.
The policy must also establish underwriting standards but will allow federally insured credit unions to participate in types of loans it does not originate. Different, and when appropriate, less stringent underwriting standards than what credit unions use when originating their own loans can be included in the policy, according to documentation provided by the NCUA at the board meeting. If a federally insured credit union both originates and purchases loans, it may establish different underwriting standards for each activity.
Biliouris said his Office of Examination and Insurance will issue guidance for credit unions that will outline supervisory expectations for the rule and provide best practices for developing policies and agreements.
The rule also requires originators to participate in the transaction for the life of the loan and restricts federally insured credit unions to participations in which the borrower is already a member of a participating credit union at the time of the purchase.
The rule will be effective 30 days after it is published in the Federal Register; Staff Attorney Pamela Yu told the board she estimates the effective date will be around August 1.
Matz said the rule was necessary because of increased participation activity in the last five years. Since December 2007, she said, credit unions have seen a 40% increase in the dollar value of participations kept on their books. However, during the same period, participation charge-offs have increased by 160%.
Representatives from both NAFCU and CUNA said they were pleased with the changes the NCUA made to the final rule. In particular, the single originator cap increase and flexibility for waivers. However, NAFCU President/CEO Fred Becker said in a prepared statement that his trade association believes the rule is unnecessary and would not justify compliance costs.
“We will scrutinize this complex rule and work with our members to determine where and how it may be improved and, if necessary, recommend revisiting the rule,” Becker said.
The board also approved a member business loan rule for state-chartered credit unions in Illinois that differs from the NCUA’s rule. Region IV Director Keith Morton told the board the rule is more conservative than the NCUA rule because it limits MBL activity to credit unions with more than $30 million in assets and eliminates the appeals process for credit unions that have had rule waiver requests denied. Illinois is the seventh state to establish MBL rules that differ from NCUA rules. The other six states are Washington, Oregon, Texas, Wisconsin, Connecticut and Maryland, Morton said.
The NCUA also distributed its May 2013 share insurance fund financial statements, which revealed a $14.7 million charge off. As of May 31, the share insurance fund has charged off $30.5 million year to date. That figure is smaller than the $37.5 million the share insurance fund had charged off as of May 31, 2012.