ALEXANDRIA, Va.-The NCUA Board last week passed tough new regulations for loan participations-known in banking as syndications-that would that would set new requirements for sellers and buyers.
Those new rules would apply to participations to single originators, to single borrower concentrations and would extend NCUA's rules from covering all federal charters to covering all state charters as well.
In addition, the new regulations also amend the agency's so-called skin-in-the-game provision to require the originating lender to retain at least 5% of the outstanding balance through the life of the loan. The skin-in-the-game requirement will apply to all originating organizations, including federally insured credit unions, privately insured credit unions, CUSOs, banks and other lenders. If the originating lender is a federally chartered credit union the risk-retention requirement will continue to be 10% of the loan, as it is now.
The new regulations arrive as a growing number of problems have been tied to the huge credit union participations market, estimated at up to $20 billion.
Several large failures of natural-person CUs recent years, including Eastern Financial Florida CU, Cal State 9 CU, Norlarco CU and Telesis Community CU, were all deeply involved in participating out their loans. All of these were state charters supervised by state regulators, not NCUA. In fact, NCUA said for 2012 the charge-off ratio for loan participations held by state charters was double that of federal charters, 1.46% vs. 0.62%.
Goal To Protect Insurance Fund
NCUA said the rationale for extending the rules to federally insured state charters is to protect the National CU Share Insurance Fund, which pays for all credit union failures, because of the interconnectivity of all participating credit unions.
The new regulation will require each credit union have its own written policies regarding loan participations; establish a borrower's membership in the originating credit union or one of the participating credit unions; and have evidence of a continuing participation interest by the originating lender for the loan's duration.
The regulation included a single originator cap of the greater of $5 million or 100% of net worth. It sets a cap of 15% of net worth for a single borrower concentration.
According to NCUA, state charters have reported a much higher delinquency and charge-off ratios on loan participations since 2007 at the beginning of the financial crisis. The delinquency ratio on participations was 2.18% for state charters in 2012, but just 1.27% for federal charters.
