"This approach of setting a regulatory limit on loan participations from one originator seems to be unique within the financial system, as we did not identify a similar restriction on bank loan participations," the association asserted. "Since there does not seem to be a greater risk within the credit union system regarding loan participations than there is for banks, this proposed limitation would arbitrarily disadvantage credit union loan participation programs."

CUNA's letter also quoted Keith Leggett, an economist with the American Bankers Association and frequent critic of credit unions and the NCUA. The letter noted that Leggett's blog had taken up the systemic risk and loan participation question.

"While I recognize that some credit unions have gotten into trouble due to loan participations, I don't believe that at this time loan participations represent a systemic threat to the NCUSIF," CUNA quoted Leggett as writing. He added, "As these comments show, even the arch enemy of credit unions (when it comes to the tax exemption and new powers) does not accept NCUA's use of systemic risk to justify the proposal."

NAFCU's letter criticized the proposal for being arbitrary and for not giving CU's a way of mitigating its impact through waivers. Like CUNA, NAFCU also attacked the proposed rule over the suggestion that loan participations presented the sort of systemic risk that would warrant such a rule.

"While loan participation delinquency rates are higher than delinquency rates of other loans credit unions make, we believe that the NCUA has clearly overstated the risk participations pose," NAFCU said. The association pointed out that loan participation delinquency rates are not as high as delinquency on bank-issued loans as reported to FDIC. The association also pointed out that there was no record of CUs with large portfolios of loan participations necessarily failing in greater numbers.

This is not to suggest that NAFCU disliked every part of the proposed rule. The trade group went out of its way to praise the notion that loan participation limits that federally chartered CU's already have should be extended to federally insured state-chartered credit unions as well.

"While we strongly oppose NCUA's proposed changes to the rule, we do believe NCUA should extend existing rules regarding loan participations to FISCUs," NAFCU wrote. 

For its part, NASCUS, which counts primarily state-chartered institutions among its credit union members, took a dim view of what it described as the way the proposal would hurt the dual chartering system.

NASCUS agreed with NCUA that some material risk with loan participations exists, but it  argued the agency failed to make a convincing case that it's the best means to mitigate that risk, especially considering its impact on dual chartering and state law.

Historically, state-chartered, federally insured credit unions have looked to state law and regulation to govern their loan participation activities, NASCUS asserted. "Taken together with NCUA's proposed expansion of credit union service organization rules to cover state-chartered credit unions, this proposed rulemaking would leave very little flexibility for states to authorize distinct powers for their credit unions," NASCUS wrote.

NASCUS wrote that "preempting state law and homogenizing the system is not the best regulatory response to possible systemic risk related to loan participations."

The Business Lending Group, a business-lending CUSO owned by Prospera Credit Union, CitizensFirst Credit Union, Fox Communities Credit Union and Pioneer Credit Union, weighed in on the proposal.

The CUSO only originates loans for its four credit union owners, BLG wrote in its comment letter, and the arrangement has allowed the four to offer business loans to their members while spreading the risk among them. The proposed rule, BLG explained, would effectively put it out of business.

"The proposed changes to the participation regulation threaten the viability of our established, successful CUSO model," BLG wrote. "The majority of BLG's loans are sold internally between its credit union members, resulting in participation totals that far exceed the 25% limit that is being proposed in the regulation. Therefore, the implementation of the new participation amendment would cripple BLG and its members in their ability to conduct member business lending."