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NCUA proposes RegFlex loan participation changes
ALEXANDRIA, Va. (12/16/11)--Changes to credit union liquidity access, loan participation investment rules, and the National Credit Union Administration's Regulatory Flexibility (RegFlex) Program were all addressed at the agency's final board meeting of 2011. The agency also okayed Virginia-based Henrico FCU's application to expand its community charter.

The board also approved for a 60-day public notice and comment period an Advance Notice of Proposed Rulemaking (ANPR) regarding whether the NCUA should issue a regulation to require FICUs to have access to backup federal liquidity sources.

The agency's ANPR outlines a number of options that credit unions could take to ensure they maintain needed liquidity in times of financial stress. Under the ANPR, credit unions could ensure liquidity by:

  • Becoming a member of the NCUA's Central Liquidity Facility (CLF) by subscribing to CLF stock or through a corporate credit union;
  • Obtaining and maintaining "demonstrated access" to the Federal Reserve Discount Window; or
  • Maintaining a certain percentage of their assets in highly liquid U.S. Treasury securities.
The Credit Union National Association's Corporate Credit Union Task Force will be reviewing the ANPR.

Another NCUA proposal released on Thursday would revise the NCUA's existing loan participation investment rules for all federally insured state credit unions (FISCUs) that purchase participations in loans originated by other credit unions. Under the proposal, loan originators would need to retain 10% of the original loan.

The proposal would also limit loan participations involving a single originator to 25% of the FISCU's net worth and set a 15% of net worth limit on loans to one borrower.

The 25% net worth requirement would not be subject to waiver, but credit unions should ask their regional directors to allow them to exceed the 15% net worth limit.

Credit unions with loan participation investments that exceed these limits would be grandfathered in to the new rule, and could exceed these limits until its loan participations have been paid off or sold.

NCUA Chairman Debbie Matz said that loan participations "are a valuable tool for credit unions to diversify loan portfolios, improve earnings, and manage their balance sheets," but also noted that "large volumes of participated loans tied to a single originator, borrower, or industry – or serviced by a single entity – have the potential to impact multiple credit unions if problems occur."

Just over 1,400 federally insured credit unions held over $12.4 billion in outstanding loan participations this year, and loan participation balances have grown by 28% since 2007, the NCUA noted.

CUNA Deputy General Counsel Mary Dunn said loan participations "are useful tools for credit unions in a variety of ways, including allowing credit unions to originate more loans that their members need."

"While material problem areas should be addressed--but only in a very targeted way--regulatory efforts should also be pursued to enhance the ability of well-managed credit unions to be involved in loan participations," she added.

Dunn also commented on the NCUA's regulatory flexibility proposal, saying that "credit unions are overburdened with too many regulations and regulatory flexibility is needed now more than ever."

The NCUA on Thursday proposed eliminating the RegFlex program and, instead, "enabling all federal credit unions to engage in activities permitted by the existing RegFlex rule without the need to apply for a RegFlex designation."

Specifically, the NCUA said, all credit unions would be permitted to donate funds to the charities of their choosing, to accept non-member deposits, subject to predetermined limits, from local governmental entities or other credit unions, and purchase private-label commercial mortgage-related securities, subject to certain net worth constraints and safety and soundness rules. Other rights would also be granted to the 1,770 credit unions that are not covered under the RegFlex designation.

A final rule that makes clarifying changes and other amendments to the NCUA's corporate credit union rule, Part 704, was also approved. The final rule includes a CUNA recommendation that the NCUA not incorporate proposed credit ratings provisions until the agency can finalize a separate proposal on credit ratings.

CUNA's Examination and Supervision Subcommittee, along with other key CUNA groups, will be reviewing the proposals in detail, and regulatory comment calls on these proposals and a Final Rule Analysis on the corporate credit union rule changes will be posted early next week.

All three of the proposals will have 60-day public comment periods.

The NCUA also approved Virginia-based Henrico FCU's application to expand its community charter, allowing the $120-million-in-assets, 21,000-member credit union to serve residents in the greater Richmond, Va. area. Matz said the credit union's community focus and its low $5 minimum balance requirement for membership convinced her to support the charter expansion.

For more on the NCUA's December board meeting, use the resource link.
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