WASHINGTON (2/21/12)--Recently proposed revisions to loan participation rules should be withdrawn, the Credit Union National Association (CUNA) urged in a comment letter sent to the National Credit Union Administration (NCUA) late last week.
Under loan participation revisions that were proposed at the agency's December Board meeting, all federally insured credit unions that are originators would need to retain a 10% interest in the loan or pool of loans participated. Federal credit unions are currently required to comply with this requirement, but the NCUA proposal would extend this requirement to state chartered federally insured credit unions as well.
All federally insured credit unions that purchase loan participations would be limited to 25% of their net worth for participations involving one originator. There would be no waiver allowed from this provision.
In addition, the proposal would set a 15% of net worth limit on purchasing credit unions on loans involving one borrower. The rule would allow this requirement to be waived in certain cases, but state chartered credit unions would have to apply to their NCUA Regional Director for approval.
"In today's overregulated environment, this proposal would add to the regulatory burden of affected credit unions in a manner that is wholly disproportionate to the risks associated with loan participations," CUNA's Deputy General Counsel Mary Dunn said. While the letter urges NCUA to drop its proposal, it offers recommendations on how concerns about loan participations could be addressed without a new regulation.
If the NCUA determines that it must go forward with a rule, the letter urges the agency to allow credit unions to establish their own loan participation limits as part of their board policies. These limits would be subject to routine review in the examination process, CUNA suggested.
Just over 1,400 federally insured credit unions held over $12.4 billion in outstanding loan participations in 2011, according to the NCUA. Loan participation balances have grown by 28% since 2007, the NCUA added. NCUA Chairman Debbie Matz last year said large volumes of participated loans tied to a single originator, borrower, or industry--or serviced by a single entity—can impact multiple credit unions if issues arise.
CUNA research has shown that credit union participation loans account for only 2.3% of total credit union loans, and just 1.3% of total credit union assets. "As a practical matter, credit union loan participations have a zero percent probability of bringing the financial system down and an imperceptibly higher risk of causing a collapse in the depository sector or even just the credit union sector," CUNA Chief Economist Bill Hampel said.
"While the proposal seeks to address concentration risks and other issues the agency has identified concerning loan participations, it would do so at the price of severely limiting, if not eliminating, sound participation programs that serve credit unions, their members, and other credit unions well" and would "seriously undermine lending programs and even earnings for some credit unions," CUNA said.
The concentration and underwriting limitations proposed would likely "minimize the ability of credit unions to mitigate risk through diversifying sources and types of loan participations," CUNA added.
CUNA has already discussed these and other concerns regarding the proposal with the NCUA, and will follow up with the agency in the coming days and weeks. Comments on the proposal are due to NCUA by February 21, and CUNA President/CEO Bill Cheney encouraged credit unions and leagues to weigh in on the NCUA proposal.
For the loan participation comment letter, use the resource link.
The regulatory burden faced by credit unions has also been addressed in a series of comment letters that CUNA filed with the Consumer Financial Protection Bureau last week. CUNA in those letters strongly urged the CFPB to thoroughly analyze new rules as well as existing rules transferred to the agency and consider how they could be amended to ease the regulatory burden faced by credit unions. (See related Feb. 15 story: Reg burden a concern as CFPB adds rules: CUNA)