NASCUS Assessing State Law Impact of Proposed Extension of Loan Participation Rules to FISCUs

Dec. 19, 2011 - The National Credit Union Administration (NCUA) approved a proposed rule that would extend existing loan participation rules for federal credit unions to federally insured state-chartered credit unions and impose new concentration limits.

Generally, the NCUA's rules regarding loan participations have not applied to federally insured state-chartered credit unions (FISCUs). Federal credit unions (FCU) are subject to a 10 percent continuing participation interest by the originating lender for the loan's duration. The new proposed rule would extend this 10 percent requirement to FISCUs. The proposed rule would also limit loan participation purchases involving a single originator to a maximum of 25 percent of a federally insured credit union's (FICU) net worth. There are no waivers proposed for this 25 percent requirement. For loan participation purchases involving one borrower or a group of associated borrowers, the maximum would be 15 percent of net worth, unless the regional director grants a waiver. The NCUA Board expects to grandfather credit unions exceeding these limits by the effective date. In addition, the proposed rule includes various other requirements such as a written agreement delineating the roles of the originating lender.

"NASCUS is increasingly concerned about the escalation of NCUA's efforts to encroach upon areas traditionally regulated by the states, such as this loan participation issue and in areas such as CUSOs," said NASCUS President and CEO Mary Martha Fortney. "The agency's movement in this direction not only preempts state law but lessens the differentiation between the charters and therefore the ability to provide a regulatory environment for innovation. More importantly, NASCUS is confident that states continue to be in the best position to mitigate safety and soundness concerns in this area for their state charters. We intend to discuss these issues in our forthcoming comment letter and in discussions with NCUA during the comment period."

A summary of this proposed rule will be available soon for NASCUS members under Regulatory Resources.