CUS: NO NEED FOR MORE 'SKIN
IN THE GAME' ON PARTICIPATIONS
ALEXANDRIA, Va.-Credit unions are urging NCUA to pause in its proposed reforms to rules for loan participations which would, among other provisions, require that all originators retain a 10% stake-so-called "skin in the game"-for the life of the loan.
The proposed requirement, which would extend to all loan originators, including banks, could cause major disruptions in the vast participations market by limiting credit union participation, according to several commenters on the proposal.
The 15% Requirement Questioned
Bruno Sementilli, president of Quorum FCU, said he supports the "skin-in-the-game" concept, but suggested the 10% minimum retention may be too limiting. "We are not convinced that a blanket 15% retention requirement provides any more of an economic incentive to write good loans than perhaps a 5% or 8% requirement would be," he wrote in his comment letter.
The 10% requirement, "is contrary to the best business practice to effectively manage the balance sheet of the credit union," wrote James Krob, director of regulatory compliance for California CU. "This change prevents the originating credit union from selling the participation interest for liquidity purposes or from selling to the other participants if there is a disagreement about servicing the loan especially in default actions."
But the section of the NCUA proposal coming under the most fire would limit credit unions to buying participations in which a single originator has a stake of 25% or less of the purchasing credit union's net worth, with no waivers allowed.
"This proposal," wrote Cory Schwab, vice president of business loans for Patelco CU, "will disrupt those trusted relationships, and will result in credit unions searching for other, less known loan participation partners. This increase in the number of partners, and decrease in familiarity of each partner, will result in increased risk to purchasing institutions."
"Limiting involvement with a single originator by establishing a cap restricts future benefits that would be derived from a longtime, well-performing relationship," commented Ronald Kampwerth, chief financial officer for Anheuser-Busch FCU.
NCUA's proposal, issued for a 60-day comment period, would broaden the application of NCUA loan participation rule, which includes the 10% skin-in-the-game provision, from the current federally chartered CUs to cover all federally insured credit unions. It would set new concentration limits similar to the ones already in the agency's member business loan rule. That includes 25% of net worth for a loan made to a single entity, and 50% of net worth for a group of originators.
NCUA figures show loan participations-known among banks as syndications-exploding in recent years. Over the last five years, loan participations have increased more than 50%, to more than $12 billion from $8 billion.
Credit unions commenting on the proposal acknowledged the increasing risk posed by the growth in loan participations but suggested that NCUA's proposal will actually increase risk to the system in some ways.
Proposal Will Drive Up Costs
Frank Berrish, president of Visions FCU, said the 25% concentration proposal will drive up a buying credit union's costs as more time and effort must be spent on due diligence seeking out more credit unions to purchase participations from. "The new regulation could have unintended consequences, as you now run the risk of 'stretching' to find more loans and CUs, thereby possibly exposing a CU to even more risk."
Brian Leonard, chief lending officer for Farmers Insurance Group FCU, said his CU's participation portfolio currently consists of a single originator, amounting to 93% of the credit union's net worth, meaning the proposed rule would require at least three additional originators and a fourth if it hopes to grow its participations.
Most of the commenters criticized the notion that specific limits will protect the participations market from systemic risk and insisted that the risk management on the part of individual credit unions is the best assurance or limiting risk.
"To restrict participations to a blanket 25% of net worth is applying a one-size-fits-all approach when the approach should be more related to the institution's participation program management, complexity, due diligence procedures and historical performances," wrote Harry Mateer, president of Altier CU. "We ask that the (NCUA) board regulate credit unions on the merits of their loan participation management rather that to apply an arbitrary limit of participations."
Other commenters said if NCUA does adopt the rule it should at least allow for waivers. "Having a waiver process in place will allow the well-managed credit unions to continue to prosper and easily highlight others that need attention," wrote Scott Meyer, president of Florida Transportation CU.
