Becker urges withdrawal on loan participations

February 21, 2012

Becker urges withdrawal on loan participations

NCUA's proposed rule on credit union loan participations represents a troublesome, one-size-fits-all approach to regulation that also appears to run afoul of the Obama administration's call for regulation that promotes growth, NAFCU President and CEO Fred Becker told the agency Tuesday.

NCUA is proposing to make the current rule on loan participations more restrictive while extending the rule to federally insured, state-chartered credit unions as well. Becker said NAFCU welcomes subjecting all insured credit unions to the rule, particularly since – as NCUA data show – delinquencies in loan participations are higher at the state-chartered institutions than at federal credit unions. But he said the rule sets arbitrary concentration limits on loan participations that do not assign adequate weight to the significant benefits loan participations offer credit unions.

Under the proposed rule, a federally insured credit union's purchase of loan participations from a single originator could not, in the aggregate, exceed 25 percent of the credit union's net worth. Purchases of loan participations involving one borrower or a group of associated borrowers would be capped at 15 percent of the credit union's net worth. A waiver could only be sought from the limit on the purchase of loan participations from one borrower or group of associated borrowers.

"NAFCU . . . does not believe the NCUA has provided satisfactory justification for having proposed such arbitrary and Draconian limits on loan participation," Becker wrote. He said NCUA fully acknowledges that loan participations allow credit unions to diversify loan portfolios, improve earnings, generate loan growth, manage their balance sheets and comply with regulatory requirements.The sale of loan participations also allows credit unions to generate liquidity.

"Unfortunately, the agency has failed to assign adequate weight to the significant benefits loan participations afford to credit unions," Becker said.

He added that NCUA overstates the risks posed by loan participations, noting that not one of the 100 top credit unions, in terms of loan participations in portfolio, has failed since 2009. Credit union loan participation delinquency rates are lower than the delinquency rates of all loans issued by FDIC-regulated banks, he added.

Regulatory oversight coupled with guidance on risk mitigation would be preferable to the proposed rule. "NAFCU strongly urges the NCUA to withdraw the proposed rule given that the possible ramifications have not been adequately examined and that the proposed rule would have significant negative consequences on many credit unions," the NAFCU presidenturged.

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