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NCUA unveils loan participation guidance
WASHINGTON (12/30/08)—The National Credit Union Administration (NCUA) has released the guidance and questionnaire the agency’s field staff uses to assist in evaluation of loan participation programs. The overall theme of the agency's release is that credit unions must apply the same principles to loan participations that they apply to evaluating, selecting and monitoring third-party relationships. The NCUA has previously expressed concern regarding loan participation arrangements and it has been expected that the federal regulator would issue more direction to help credit unions avoid pitfalls. The agency reported that outstanding loan participations more than doubled between 2003 and 2008, increasing 262% in that period compared to a 149% increase in total loans. What’s more, the NCUA said annualized total dollars of loan participations charged off in 2008 were twice 2006 levels, resulting in the charge-off ratio increasing from 0.41% in 2006 to 0.64% in 2008. The charge-off ratio for total loans increased from 0.46% in 2006 to 0.75% in 2008. Loan participation delinquency was 1.10% in 2006 and 2.27% in 2008. Total loan delinquency was 0.68% in 2006 and 1.13% in 2008. The NCUA maintains that loan participation programs have their place. In his Letter to Federal Credit Unions, with guidance attached, NCUA Chairman Michael Fryzel said that properly managed loan participation programs can be beneficial to both selling and buying credit unions. A credit union selling loan participations may gain a mechanism to manage interest rate, liquidity, and credit risks as well as an enhanced ability to serve members. The purchasing credit unions may benefit from balance sheet diversification and increased revenue. However, the chairman reminded that there are potential risks and advised that a credit union should perform a comprehensive risk assessment before beginning loan participation activities. Due diligence, he said, is a key factor in assuring risks are identified and mitigated. The attached guidance and questionnaire regarding evaluating loan participation programs sets our 11 pages of direction and resources to assist credit unions in setting up successful programs. It describes practices examiners will find in a well-run loan participation program involving any type of loans, including automobiles, residential mortgages, and member business loans. The NCUA, for instance, recommends that a credit union deciding to engage in or develop a loan participation program start out small, gain experience, and build from that foundation. “A loan participation is a third-party relationship between a seller and a buyer, and as with any third-party relationship, the benefits of loan participations are accompanied by a variety of potential risks. Management should complete a risk assessment and perform due diligence prior to entering the third-party arrangement,” the guidance said. This guidance describes practices examiners will find in a well-run loan participation program involving any type of loans, including automobiles, residential mortgages, and member business loans.
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