HIGHTSTOWN, N.J. – Today, in a comment letter to NCUA, the New Jersey Credit Union League urged the agency to withdraw its proposed revision to loan participation rules.
“Loan participations are extremely important to credit unions in their ability to generate liquidity, assist in the management of loan concentration issues, and provide favorable returns for credit unions when faced with a sluggish lending demand," NJCUL President/CEO Paul Gentile said. "Loan participations also allow for diversification of lending risk by both asset class and geographic concentration. Additionally, loan participations also serve as an essential tool for managing aggregate business caps.”
NCUA, in its December Board meeting, proposed amendments to loan participation rules that all federally insured credit unions that are originators would need to retain a 10% interest in the loan or pool of loans participated. Federal credit unions are currently required to comply with this requirement, but the NCUA proposal would extend this requirement to state chartered federally insured credit unions as well.
The proposal would also set a 15% of net worth limit on purchasing credit unions on loans involving one borrower. The rule would allow this requirement to be waived in certain cases, but state chartered credit unions would have to apply to their NCUA Regional Director for approval.
NJCUL took particular exception to the amendment requiring all federally insured credit unions that purchase loan participations would be limited to 25% of their net worth for participations involving one originator. There would be no waiver allowed from this provision.
"NCUA’s proposal ‘to impose a limit on loan participation purchases for federal and state chartered federally insured credit unions from a single originator to 25% of the purchasing credit unions net worth’ is a poor gauge for any proposed caps. Capital is a cushion, yes, for potential losses, but also a reservoir for investing in the credit union’s business for the future. Tying loan participations to ‘net worth’ is a dangerous path to take a credit union’s asset liability management down. If this amendment is finalized, what next? Home loans?" Gentile said.
While the letter urges NCUA to drop its proposal, it offers recommendations on how concerns about loan participations could be addressed without a new regulation. Should NCUA move forward with the proposed changes, the NJCUL letter urges the agency to allow “credit union’s management and board of directors to determine the level and types of participation lending, including concentration limits, based on that individual credit union’s financial position; including capital position and expertise.”
NJCUL’s comment letter sent to NCUA is available for download here.