ALEXANDRIA, Va.-NCUA proposed last week 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 CUs, come as NCUA data shows that losses on loan participations are greater for state charters, which buy and sell the majority of loan participations.
The proposal, issued for a 60-day comment period, would 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 rule would also extend the agency's current requirement that a credit union hold 10% of a pool of loans to be sold-so-called skin in the game-into a participation through the duration of the loan to all federally insured credit unions instead of only federal charters.
Other provisions of the proposal will require credit unions to identify each participated loan, set out servicing responsibilities for the loan, and include notice and disclosure requirements regarding the ongoing financial condition of the loan, the borrower and the servicer.
NCUA figures show loan participations have exploded in recent years. Over the last five years, outstanding loan participations have increased more than 50%, from $8 billion to more than $12 billion.
Matz said the aim of the rule is to limit potential system risk of loan participation deals. In fact, several major CU failures in recent years, including Eastern Financial Florida CU, Norlarco CU and Cal State 9 CU, had sold shares in participation pools to dozens of CUs, spreading around tens of millions of dollars in losses throughout the 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 charters held 68% of all participations sold and 55% of participations bought, and the delinquency and charge-off ratios for state charters is much higher.
Reg Flex On The Docket
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 CUs, and allows all federally chartered credit unions to participate if they are well-capitalized. The proposal would ease the regulatory burden on well-capitalized credit unions with regard to NCUA's rules on fixed-assets, holding of zero coupon investments, borrowing repurchase transactions, accepting non-member deposits, buying commercial mortgage real estate securities, eligible obligations and the making of charitable contributions.
The proposal would, in effect, extend Reg-Flex from the current 2,700 federally chartered credit unions that are rated either CAMEL 1 or CAMEL 2 that are already under the program, to include all federal charters, another 1,800 credit unions, but only, in most cases, if those credit unions are considered well-capitalized. Many, but not all, states have their own Reg-Flex program applying to their state charters.
