Compliance Blog

Jun 18, 2012
Categories: Consumer Lending

Revisiting the Loan Participation Proposal

Written By JiJi Bahhur, Regulatory Compliance Counsel

Last Friday, we revisited the CUSO proposal, a rule that we’ve been waiting ever so patiently for NCUA to finalize.  And as I mentioned in Friday’s blog, a discussion of the final rule will take place at NCUA’s Board Meeting on June 21. 

Since we’re in the mode of revisiting proposals that have been outstanding for a while, I thought I’d remind you all about another one . . . the Loan Participation proposal.  The proposal was published in the Federal Register last year and NAFCU commented on the proposal this past February. 

As a recap, the proposed rule provides for:

  • Concentration limits on loan participations, including: (1) a limit on the aggregate amount of loan participations that may be purchased from one originating lender to 25 percent of the credit union’s net worth; and (2) a limit on loan participation purchases involving one borrower or a group of associated borrowers to 15 percent of the credit union’s net worth.
  • A grandfathering clause for credit unions that exceed the concentration limits at the percentage rate of concentration on the effective date of the final rule.  The grandfather rates, however, will diminish down to the 25 and 15 percent limits as participations are paid off or sold.
  • The inability of credit unions to seek a waiver from the proposed limit related to purchases from one originating lender. A credit union, however, may seek a waiver on the proposed limit on purchases involving one borrower or a group of associated borrowers.
  • An extension of the loan participation regulations to federally-insured state-chartered credit unions, including the requirement to retain 10 percent interest of the loan that the credit union seeks to sell.

In its Comment Letter, NAFCU strongly opposed the proposed rule on the basis that the proposed concentration limits would significantly harm many credit unions.  NAFCU argued that loan participations afford credit unions significant benefits, to which the agency has not provided adequate weight.  Also, the proposal’s one-size-fits-all approach disregards individual credit union relationships with lenders and effectively take away a tool that a credit union needs to diversify its loan portfolio, improve earnings, generate loan growth, manage its balance sheet and/or comply with regulatory requirements. 

For a full reading of the proposal, you can view it here.  But note that just like the CUSO proposal, it is quite likely that revisions will be made to the original proposal.  According to a CU Times article, during NCUA’s second Listening Session, Debbie Matz told the audience that NCUA was well aware that credit unions were against the proposed 25% participation loan cap.  Matz also stated that the NCUA is planning to make changes before issuing the final loan participation rule; however, she did not say what the final cap would be.  We expect to see a finalized rule on loan participations by the end of this summer of early fall.

If you are a NAFCU Member, you can view NAFCU’s Regulatory Alert on Loan Participations here.  If you are not a member, NAFCU’s Comment Letters are open to the public and can be viewed here.