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NAFCU to NCUA: Eliminate unnecessary loan participation purchasing cap
NAFCU Vice President of Regulatory Affairs Ann Kossachev Thursday wrote to the NCUA urging the agency to eliminate a requirement that a federally-insured credit union’s (FICU) internal written loan participation policies must establish a limit on the amount of aggregate loan participations that may be purchased by a single borrower, or group of associated borrowers, not to exceed 15 percent of the FICU’s net worth.
This burdensome rule “ignores meaningful differences among individual FICUs and imperils rather than supports the most modest FICUs – those FICUs the NCUA routinely recognizes face an uphill battle for survival,” wrote Kossachev.
Citing the strict field of membership requirements and the ongoing impact of the pandemic, Kossachev noted that many FICUs use loan participation agreements to smooth out transient imbalances between deposit-taking and lending activities and to reduce risks to themselves as well as risks to the National Credit Union Share Insurance Fund.
The NCUA’s Temporary Regulatory Relief in Response to COVID-19 interim final rule, issued in April 2020, temporarily raised the maximum aggregate amount of loan participations a FICU could purchase from one originating lender from $5 million or 100 percent of the FICU’s net worth to $5 million or 200 percent of the FICU’s net worth. However, for smaller FICUs who face the greatest risks, this regulatory relief may have been misleading.
“These FICUs remain effectively prohibited from acquiring any loan participation interests because other prescriptive loan participation thresholds, including §701.22(b)(5)(iv), remain in force and loan participation agreement transaction costs are substantial,” noted Kossachev.
Because loan participation agreements have high fixed costs and relatively low variable costs, individual loan participation interests tend to represent significant capital commitments which are out of reach for smaller credit unions under the present 15 percent of net worth limitation.
“Not only would other clear and meaningful investment thresholds remain in force, but the NCUA’s eliminating [the regulation] would do nothing to weaken regulatory requirements related to loan participation agreement sufficiency or FICUs’ underwriting standards,” added Kossachev.
Read the letter. NAFCU remains engaged with the NCUA to ensure credit unions are protected from burdensome regulatory requirements.