WASHINGTON-NCUA Chairman Debbie Matz proposed several regulatory measures last week, including new rules on loan participations that would require originators to retain some of the loans they participate out.
Originators of these loans would have to retain some of the original loan risk on their balance sheets-hold some "skin in the game," Matz told about 400 attendees to NAFCU's annual Congressional Caucus. "They cannot solely reap the rewards while exporting all of the risk to other credit unions," she said of the exploding market for loan participations. "Requiring originators to keep some 'skin in the game' will provide a disincentive for the kinds of reckless behavior that puts the [National CU] Share Insurance Fund at risk."
The bid comes as other regulators-but not NCUA-are crafting their own "skin in the game" rules that will require loan originators to retain at least 5% of loans sold on the secondary market. Still, credit unions that sell their loans on the secondary market will have to comply with those new rules.
The NCUA proposal would also require new due diligence by participants, including proper review before and throughout the life of a loan participation. "It's crucial for credit unions to be fully aware of the risks before they enter into participation agreements-and to monitor them closely," said Matz.
"Because some of these individual loans are very large and involve several credit unions, failure of one or more of these syndicated loans could cause a significant loss to the Share Insurance Fund," according to Matz.
In fact, several large credit union failures in recent years have involved hundreds of millions of dollars in loan participations that threatened dozens of credit unions through contagion. Norlarco CU, the Colorado credit union that failed in 2008 because of its ties to Florida real estate speculation, threatened dozens of other credit unions with losses. The failure of subprime auto lender Centrix Financial also spread losses throughout dozens of credit unions because of the pools of participated loans.
NCUA figures show loan participations-known among banks as syndications-exploding in recent years. Over the last five years, while most other types of loans declined, outstanding loan participations have increased more than 50%, from $8 billion to more than $12 billion.
