Newsroom

December 16, 2011

Loan participations, emergency liquidity eyed

A long-anticipated proposal to limit concentrations of loan participations at all federally insured credit unions and requiring originators to keep "skin in the game" was released by the NCUA Board Thursday for a 60-day comment period.

This is the first time NCUA has applied its loan participation rules to state-chartered, federally insured credit unions as well as FCUs.

The proposed rule would bar insured credit unions from buying participations in loans originated with lower underwriting standards than their own. It would require the originating credit union to retain a 10 percent stake in participations throughout the loans' duration.

Concentration limits for loan participations would be tied to a credit union's net worth. Loan participation purchases from a single originator would be limited to 25 percent of the purchasing credit union's net worth. For participations with a single borrower or a group of associated borrowers, the concentration limit would be 15 percent. Credit unions would be able to seek a waiver on the second limit but not the first.

NCUA Chairman Debbie Matz, during Thursday's open board meeting, acknowledged the importance of loan participations as a tool for credit unions but also noted their potential for creating systemic risks. She encouraged credit unions to comment on the rule and said the agency is particularly interested in receiving input on the waiver process.

NCUA Board Member Gigi Hyland noted an apparent irony in that NCUA is looking to expand RegFlex while seemingly working to tighten the loan participation rules, but she said the agency is trying to strike the right balance between regulatory relief and safety and soundness. While noting her earlier opposition to the proposal, Hyland said it behooves NCUA to act on data it has seen regarding loan participation risk. Matz added that some credit unions have already failed because of loan participations, so the agency is responding to real situations.

In other action Thursday, the NCUA Board issued an advanced notice of proposed rulemaking seeking credit unions' input on whether federal credit unions should be required to have access to backup federal liquidity sources during financial emergencies.

NCUA is considering whether credit unions should be required to demonstrate this access in the following ways:

  • becoming a member of NCUA's Central Liquidity Facility directly;
  • attaining CLF membership through a corporate credit union;
  • gaining access to the Federal Reserve's discount window; or
  • maintaining a certain percentage of assets in highly liquid Treasury securities.

Matz said the agency wrestled over whether it should exempt federal credit unions of a certain size. She encouraged credit unions to provide input on the ANPR, particularly with respect to the asset-size issue.

Both the loan participation proposal and the emergency liquidity ANPR will be published in the Federal Register for 60-day comment periods. NAFCU is preparing a Regulatory Alert for members.