Use This Flexibility While You Have the Chance

January 10, 2022 at 9:31 am Leave a comment

Yours truly has been under the weather, but now that I’m back in the saddle, there’s a lot to talk about. 

My sleeper pick for the most important regulatory amendment that no one is talking about is the NCUA’s decision to extend for another year the increased flexibility given to credit unions during the pandemic to purchase eligible obligations and loan participations. 

Loan participations, which allow credit unions to purchase parts of loans they did not originate, and eligible obligations, which permit credit unions to purchase entire loans, provide an essential means of liquidity for the industry.  When used properly, they allow credit unions to avoid excessive concentration risk by selling all or portions of some loans and permitting other credit unions to get into the action by purchasing these loans. 

There are, of course, important restrictions on both of these products.  First, when it comes to loan participations, federal regulations limit the amount of participations that can be purchased from any one lender.  Secondly, when it comes to eligible obligations, the borrower must either be a member of the purchasing credit union or the loan must be refinanced within 60 days of purchase so that the borrower is a member. There are exceptions to this rule for qualifying credit unions purchasing the assets of liquidating credit unions. 

Let’s not forget that in March 2020 the economy was put into a self-induced economic coma.  The NCUA responded by, among other things, temporarily raising the maximum aggregate amount of loan participations that a FICU may purchase from a single originating lender to the greater of $5,000,000 or 200% of the credit union’s net worth and temporarily suspending certain limitations on the types of eligible obligations that a FICU may purchase and hold. In one of its last acts of 2021, the Board concluded that the continued economic uncertainty justified continuing these regulations for another year.  This conclusion has already been vindicated as the economy continues to produce contradictory smoke signals on a weekly basis. 

These temporary amendments provide potential benefits that go beyond the immediate economic situation.  The existing eligible obligation regulations are too restrictive now that more and more platform lenders are getting into the business of facilitating loan participations and eligible obligations.  While the explosion of these services offers expanded opportunities, particularly for smaller credit unions looking for a way to use all those deposits, credit union membership requirements continue to place restrictions on the use of these platforms by the industry.  By extending flexibility for another year, credit unions can further demonstrate that traditional regulations are needlessly restrictive and actually inhibit safety and soundness.

On that note, stay warm and enjoy your day.

Entry filed under: Compliance, COVID-19, Regulatory, Technology. Tags: , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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