ALEXANDRA, Va. – NCUA proposed this morning to expand its rules governing loan participations—including the 10% “skin in the game” requirement—from the current federally chartered credit unions to cover all federally insured credit unions.
The proposals, which would cover an additional 3,000 federally insured state chartered credit unions, come as NCUA data shows that losses on loan participations are greater for state charters, which buy and sell the majority of loan participations. “We need to be making sure that all federally insured credit unions adhere to the same standards,” said NCUA Chairman Debbie Matz.
NCUA figures show loan participations—known among banks as syndications—exploding in recent years. Over the last five years, while some other types of loans have declined, outstanding loan participations have increased more than 50%, from $8 billion to more than $12 billion.
The proposal, issued for a 60-day comment period, would broaden the agency’s rules for loan participations to require new concentration limits on the purchase of participations, including 25% of net worth for a loan made to a single entity and 50% of net worth to 50% of net worth for a group of originators. The limits are similar to the ones set in NCUA’s current rule on member business loans.
The rule would also extend the agency’s current requirement that a credit union hold 10% of a pool of loans to be sold into a participation—so-called skin in the game--through the duration of the loan to all federally insured credit unions. The requirement currently applies to federal charters only.
Matz said the aim of the rule is to limit potential systemic risk of loan participation deals. In fact, several major credit union failures in recent years, including Eastern Financial Florida CU, Norlarco CU and Cal State 9 CU--all state charters--had sold shares in participation pools to dozens of credit unions, spreading around tens of millions of dollars in losses throughout the credit union system.
“We’ve had credit unions that have failed because of their exposure to loan participations,” said Matz. “When we got to the bottom of it we found that they had participated in loans that were very risky.”
NCUA data shows that state chartered credit unions held 68% of all participations sold and 55% of participations bought, while the delinquency and charge-off ratios for state charters is much higher than that for federal charters, according to Matz.
The NCUA Board also issued for comment a proposal to scrap its regulatory flexibility, or Reg-Flex, rule, which eases regulatory burden on well-capitalized credit unions, and allow all federally chartered credit unions to participate, in most cases if they are well-capitalized. The proposal would ease regulatory burden on well-capitalized credit unions in with regard to NCUA’s rules on fixed-assets, holding of zero coupon investments, accepting non-member deposits, buying commercial mortgage real estate securities and eligible obligations.
The NCUA Board, in its final meeting of 2011, also approved a request from Henrico FCU, a $120 million Richmond, Va., credit union, to serve one million people in 16 counties surrounding and including Richmond.
