While the new 100% cap in the revised loan participation rule does nothing to mitigate credit risk on a business loan, it does address lead lender risk.
That's one of the opinions of Larry Middleman, president/CEO of CU Business Group LLC, a Portland, Ore.-based business lending and services CUSO that serves 426 credit unions in 44 states.
“If a lead lender gets in trouble, whether it be financially or through a loss of key personnel or expertise, a participant may have more limited exposure to that situation than with no limit on purchases from any one lead lender,” Middleman said.
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On Thursday, the NCUA Board approved several changes to the loan participation rule. Among them, purchasing credit unions will be subject to a single-originator concentration limit of $5 million or 100% of net worth, whichever is greater.
The risk retention requirement for originating federal credit unions will be 10%, as required by the Federal Credit Union Act, the NCUA Board said. The risk retention requirement for other originating eligible organizations, including federally insured, state-chartered credit unions, will be 5% consistent with the standard for securitizers under the Dodd-Frank Act unless state law requires a higher percentage.
Middleman said he is pleased to see the NCUA revise the maximum participation purchases from 25% of net worth from any one originator to the greater of 100% of net worth or $5 million.
“Ideally a participating credit union will develop a solid, trusting relationship with the lead lender over time,” Middleman offered. “The increased cap allows for a better payback on the cost of doing proper lead lender due diligence, both at the time of initial purchase and throughout the life of the relationship.”
In addition, Middleman said the increased cap also allows a participant to gain efficiencies by buying from fewer lead lenders, which saves time and reduces cost.
“I also commend the new regulation for allowing credit unions to purchase participations in types of loans they do not originate as that allows for better portfolio diversification,” Middleman added.
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