ARLINGTON, Va.-Federal credit unions and state regulators are urging NCUA to reconsider its proposed rule on loan participations in comment letters filed with the federal agency.
State regulators, represented by NASCUS, said they also are concerned about loan participations, but suggested there are other, more appropriate ways to address those issues-methods that don't have an impact on dual chartering and state law. Among those other ways-strong underwriting, adequate program contract review and effective third-party due diligence, NASCUS said.
"We strongly recommend NCUA work with state regulators to address supervisory concerns regarding loan participations in a manner that does less harm to the dual chartering system, more effectively mitigates material risk, and improves oversight while not unnecessarily burdening credit unions," NASCUS wrote.
Among the group's recommendations:
• Proposed rulemaking should focus on underwriting and effective adoption and implementation of policies.
• State law and regulation should continue to govern loan participations for state credit unions.
• The proposed rulemaking should focus on non-agriculture commercial lending.
• Waiver provisions should be meaningful.
• Loans sold with recourse should be excluded.
• Provisions applicable to state-charters should be incorporation within §741.
"Taken together with NCUA's proposed expansion of credit union service organization (CUSO) rules to cover state-chartered credit unions, this proposed rulemaking would leave very little flexibility for states to authorize distinct powers for their credit unions," NASCUS wrote, noting that the NCUA proposed rule concludes that "certain requirements should be consistent among all FICUs to minimize systemic risk. Increasing numbers and balances in loan participation portfolios, among both federal credit unions and FISCUs, indicate such a regulatory approach is warranted." But NASCUS said it believes that preempting state law and homogenizing the system is not the best regulatory response to possible systemic risk related to loan participations.
Like a number of other commentaries on the proposed reg, NASCUS also took issue with NCUA's "skin-in-the-game" 10% risk retention requirement, but its concerns are related to leaving such issues in the hands of state law and state regulators for state charters.
For its part, NAFCU strenuously objected to the loan participation rule, saying it institutes arbitrary concentration limits on such transactions without taking into account the major benefit participations afford credit unions while exaggerating the potential risk.
"NAFCU also does not believe the NCUA has provided satisfactory justification for having proposed such arbitrary and draconian limits on loan participation," the trade group wrote in its comment letter. "NCUA's stated basis for issuing the proposal is risk to the National Credit Union Share Insurance Fund (NCUSIF) stemming from the delinquency rate of loan participations. While loan participation delinquency rates are higher than delinquency rates of other loans credit unions make, we believe that the NCUA has clearly overstated the risk participations pose..."
NAFCU also argued the rule takes a "one-size-fits-all" approach to regulating loan participations rather than what it called "proper regulatory oversight" that would take into account the specific facts in each case, such as the amount of expertise and experience a credit union may have.
