Exceeding Member Business Lending Cap Can be Done with NCUA Approval But Caveats Should be Understood

NEWPORT BEACH, Calif. – As more credit unions get involved in loan participations to manage the 12.25% member business lending cap, NCUA is quite aware of one possible loophole. A credit union can not exceed its aggregate loan cap for loans made to its members but if its aggregate loan cap would be exceeded by the sum of the outstanding balances of member loans, participation interests purchased and non-member loans purchased, it can apply to the NCUA regional director for permission to exceed the cap, said Guy Messick, legal counsel for NACUSO. “NCUA understands that credit unions could play games to avoid the aggregate loan cap for member loans by trading loans back and forth,” Messick said. “(That’s) the reason why the application for approval to exceed the cap includes a certification that the non-member loans and loan participations are not being used in conjunction with one or more other credit unions that are trading loans solely for the purpose of avoiding the cap.” In business lending, loan participations are also used to manage the Credit Union Membership Access Act’s aggregate business loan cap, which is 12.25% of total assets. In the proposed amendments, NCUA was not going to count participation interests in business loans in calculating the aggregate cap, Messick said. In the final version of the Act’s amendments, loan participations in business loans are counted toward the purchasing credit union’s aggregate loan cap. As for the originating credit union, the amount of the loan participation sold is removed from the amount counted toward the originating credit union’s aggregate loan cap as long as the participation interest is sold without recourse. The risk of repayment is shared by all participants in proportion to their participation interests, Messick reiterated. For example, Messick said if a credit union has a $100,000 business loan to its member and sells 50% of the loan to another credit union, each credit union counts $50,000 toward their respective aggregate loan cap. This amount is reduced as the loan is paid down. “Note that a credit union that qualifies for Reg Flex status can buy the business loan of another credit union outright,” Messick said. “They can buy the whole loan made by another credit union to its member. This would be a non-member loan to the purchasing credit union.” NCUA is drawing a distinction between member loans on one hand and participation interests and non-member loans on the other hand, as the language of the Act only restricts the credit union’s ability to lend to its members, Messick explained. In the end, loan participations are “very valuable tools” because they can be used to allocate risk among two or more credit unions and originating credit unions use them to generate liquidity. Purchasing credit unions can also use loan participations in lieu of purchasing investments with their excess cash. NCUA’s passage of the Member Business Lending Regulation opened the doors for credit unions and CUSOs to expand business services. Messick lists a number of reasons why a credit union would run a business loan through its CUSO including having the ability to serve non-members. “Keep in mind that CUSOs still have to primarily serve members of the affiliated credit unions,” Messick said. “A CUSO has the ability to have a minority of its business loans with non-members.” Going through a CUSO means there are no restrictions on the type or number of loans because they are “not confined” by CUMAA limitations or NCUA’s rules and regulations. “If the credit union is in danger of exceeding its regulatory limit, the CUSO can be the lender,” Messick pointed out. Other justifications for offering a business loan through a CUSO are the ability to manage regulatory risk. If a credit union had a non-conforming loan or a loan that had a higher risk factor than the credit union is comfortable with, it could place that loan in its CUSO, Messick said. “Another loan might have financial ratios that are not within the credit union’s polices but the loan risk is reasonable. In that case, the CUSO could take the loan,” Messick said. Credit unions could also raise outside capital by running business loans through a CUSO by selling a portion of the CUSO to other credit unions or to non-credit union investors. If there is strong demand for loans, more members will be able to be served at a lower cost of funds than if the funds were borrowed by the credit union, Messick explained. -