The National Credit Union Administration board recent passed tough new regulations for loan participations—known in banking as syndications—that would that would set new requirements for selling and buying participations, for participations to single originators, for single borrower concentrations and extend its rules from covering all federal charters to cover all state charters as well.
The new regulation also amends the agency’s so-called skin-in-the-game provision to require the originating lender to retain at least 5% of the outstanding balance of the loan 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 that credit unions participate with. 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.
“We are mindful that loan participations strengthen the credit union industry by providing a useful way for credit unions to diversify their loan portfolios, improve earnings, generate loan growth, manage their balance sheets and comply with regulatory requirements,” said NCUA Chairman Debbie Matz. “As a regulator, however, we need to put in place appropriate safeguards to ensure the loans are made safely.”
The new regulation comes 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 in recent years, 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% versus 0.62%.
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 interconnectedness of all participating credit unions. The NCUSIF was saddled with tens of millions of dollars in recent years because of poor underwriting and even fraud involved in various participation schemes, including the failure of the Central States Mortgage CUSO, the Millionaire's University real estate scheme in South Florida that claimed three credit unions; and the Centrix Financial subprime auto program.
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, or skin-in-the-game, 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.
Among the changes to the original proposal was that NCUA agreed to allow a purchasing credit union to participate in types of loans it does not originate.
According to NCUA, state charters have reported a much higher delinquency and charge-off ratios on loan participations since the 2007 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.
