Loan Participations; Purchase, Sale and Pledge of Eligible Obligations; Purchase of Assets and Assumption of Liabilities

SUMMARY: NCUA amends its loan participation rule, eligible obligations rule, and requirements for insurance rule to clarify how the loan participation rule is to be applied and how it relates to other rules. The amendments reorganize the loan participation rule and focus on the purchase side of loan participation transactions. The amendments make it easier to understand NCUA's regulatory requirements for loan participations. The amendments also expand loan participation requirements to federally insured, state-chartered credit unions (FISCUs).

DATES: This rule is effective July 25, 2013.

FOR FURTHER INFORMATION CONTACT: Pamela Yu, Staff Attorney, Office of General Counsel at (703) 518-6540; or Matthew J. Biliouris, Director of Supervision, Office of Examination and Insurance at (703) 518-6360.

SUPPLEMENTARY INFORMATION:

I. Background

II. Summary of Public Comments

III. Section-by-Section Analysis of the Final Rule

IV. Regulatory Procedures

I. Background

A. Why is NCUA adopting this rule?

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. Credit unions also use liquidity obtained through the sale of loan participations to increase the availability of credit to small businesses and consumers.

Nevertheless, the NCUA Board (Board) believes that loan participations also pose an inherent risk to the National Credit Union Share Insurance Fund (NCUSIF) due to the interconnectedness between participants. For example, large volumes of participated loans may be tied to a single originator, borrower, or industry or they may be serviced by a single entity. If any one of those entities experiences a financial or other problem, the effects of such concentration could impact multiple credit unions. Additionally, because both federal credit unions (FCUs) and federally insured, state-chartered credit unions (FISCUs) actively engage in loan participations, there is potential risk to the NCUSIF. Accordingly, it is important to the safety and soundness of the NCUSIF that all federally insured credit unions (FICUs) adhere to appropriate standards when transacting loan participations.

Finally, it has come to NCUA's attention during examinations and other supervisory contacts with FICUs that many credit union officials find the loan participation rule unclear as to whom it applies, and what transactions it covers. This rule is intended to address this concern. For these reasons, the Board is issuing this final rule to amend SUBSEC 701.22, 701.23, and 741.8.

B. What changes were included in the proposed rule?

In December 2011, the Board issued a proposed rule to amend the loan participation rule. /1/ The proposal reorganized the rule to make it easier to read and understand. It also changed the rule's focus to address the requirements for a credit union purchasing a loan participation. In addition, to ensure that loan participation transactions are conducted in a safe and sound manner, the proposed rule prescribed certain concentration limits on credit unions and encouraged credit unions to establish others of their own. It also required that a loan participation agreement include specific provisions to assist a purchasing credit union in conducting its due diligence. The Board proposed these changes to better detail NCUA's regulatory expectations regarding key aspects of a loan participation purchase, including: (1) The credit union's loan participation policy; (2) the loan participation agreement; and (3) ongoing monitoring of the loan participation.

FOOTNOTE 1 76 FR 79548 (Dec. 22, 2011). END FOOTNOTE

II. Summary of Public Comments

The public comment period for the proposed rule ended on February 21, 2012. NCUA received 215 comments on the proposed rule: 48 from FCUs; 53 from state-chartered credit unions; 5 from trade associations (1 representing community development credit unions; 2 representing credit unions; 1 representing state credit union supervisors; and 1 representing credit union service organizations (CUSOs)); 23 from state credit union leagues; 11 from CUSOs or third party vendors; 73 from individuals or credit union volunteers (including 67 identical letters); and 1 from a law firm.

A majority of the comments on the proposal expressed opposition to, or raised concerns about, one or more aspects of the proposal. A number of commenters, however, supported at least one specific aspect of the proposal or expressed general support for its overall intent and key principles.

A. What were the general comments supporting the proposed rule?

A significant number of commenters supported applying the loan participation rule's provisions to FISCUs. These commenters maintained that the data quoted in the proposed rule's preamble demonstrates that applying the rule to FISCUs is appropriate. Some commenters also suggested that subjecting FCUs and FISCUs to the same requirements would promote the loan participation market and increase participation activity.

Commenters expressed general support for the loan originator retention requirement of 10 percent of the loan amount as required by the Federal Credit Union Act (FCU Act) for FCUs, and the single borrower concentration limit of 15 percent of a credit union's net worth.

Additionally, some commenters supported the proposed provision requiring a credit union to use underwriting standards for purchasing loan participations similar to those the credit union uses when it originates a loan. As discussed below, however, the majority of commenters opposed this provision.

B. What were the general comments opposing the proposed rule?

There were two proposed provisions that generated the greatest degree of concern for the majority of commenters. They were: (1) The single originator concentration limit of 25 percent of net worth; and (2) the requirement that a FICU establish underwriting standards for loan participations which, at a minimum, meet the same underwriting standards the FICU uses when it originates its own loan.

More generally, commenters suggested that the proposal would significantly limit a FICU's ability to sell and purchase loan participations, while providing only limited safety and soundness benefits. They argued that the rule should allow greater flexibility, particularly because of the importance of loan participations in helping credit unions to diversify their portfolios, improve earnings, manage and generate liquidity, manage asset growth, maintain an adequate capital ratio, diversify lending risk, and address loan concentration issues.

Commenters also expressed concern that the rule would impose undue regulatory burdens on credit unions, with a disproportionately adverse impact on smaller credit unions. They asserted that the proposal was misguided in prescribing a one-size-fits-all approach, without considering the asset size, level of experience, or risk profile of each individual credit union. Instead, commenters suggested that the rule should focus on identified problem areas or on participations where the risk profile for the underlying loans is higher, such as participations in member business loans (MBLs) and commercial real estate loans.

In addition, commenters maintained that loan participations do not represent a systemic risk to the NCUSIF and suggested the proposal may actually increase the overall risk to the NCUSIF. Commenters argued that limiting the ability of credit unions to mitigate risk through diversification could increase, rather than reduce, risk exposures.

Several commenters also expressed concern that the proposal would undermine the dual chartering system. These commenters suggested that state law and regulation should continue to govern loan participations for FISCUs.

NCUA has carefully reviewed and considered all the comments it received in response to the proposal. Acknowledging the substantial concerns raised by commenters, the Board has made adjustments to the final rule. Most notably, the final rule establishes a higher, more flexible single originator concentration limit. It also permits a FICU to purchase a participation in a loan even if it does not originate that kind of loan. A section-by-section analysis of the final rule and a discussion of the pertinent public comments follows.

III. Section-by-Section Analysis of the Final Rule

A. SEC 701.22--Introductory Text

The introductory text clarifies the scope of the rule and helps distinguish a loan participation under SEC 701.22 from an eligible obligation under SEC 701.23. Further, it clarifies that the rule applies to a natural person FICU's purchase of a loan participation where the borrower is not a member of that credit union. Generally, an FCU's purchase, in whole or in part, of its member's loan is covered by NCUA's eligible obligations rule at SEC 701.23. /2/ Additionally, by a cross-reference to Part 741 of NCUA's regulations, the rule also is made applicable to natural person FISCUs. The Board notes that corporate credit unions are subject to the loan participation requirements set forth in Part 704 and, therefore, are not subject to SEC 701.22 of NCUA's regulations.

FOOTNOTE 2 Note, however, a limited exception for certain well capitalized federal credit unions to purchase, subject to certain conditions, non-member eligible obligations from a FICU. 12 CFR 701.23(b)(2). END FOOTNOTE

Some commenters expressed continued confusion regarding the scope of SEC 701.22 and SEC 701.23 of NCUA's regulations. The final rule clarifies the interplay between SEC 701.22 and SEC 701.23, but the Board acknowledges these regulations are complex so additional modifications have been made to further clarify the introductory text to the final rule.

B. SEC 701.22(a)--Definitions

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "12 CFR Parts 701 and 741"

RIN Number: "RIN 3133-AEOO"

Citation: "78 FR 37946"

Federal Register Page Number: "37946"

"Rules and Regulations"