ALEXANDRIA, Va. The NCUA Board said this afternoon it will vote Thursday on the proposed loan participation rule aimed at bringing more regulatory scrutiny to the growing market.
The proposal issued by NCUA in December 2011 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.
NCUA Chairman Debbie Matz said when the proposal was issued for comment 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 at the time. “When we got to the bottom of it we found that they had participated in loans that were very risky.”
