When done well, loan participations spread income making opportunities to the buyers and provide funds for the sellers to serve more members.
Spreading credit risk across multiple loans and multiple types of loans in disparate geographic areas also tends to be a safer risk strategy. When done poorly, loan participations are like a bad virus that spreads losses to buyers.
While there are a handful of very high profile examples of loan participations done poorly, loan participations have an overwhelming positive effect, especially in this economic climate where a few credit unions with good lending opportunities have loans they can share with credit unions looking for loans.
The biggest change in the loan participation rule is the limit on the purchase of loan participations from a single originator. The original proposal was only 25% of net equity. The industry was pushed back hard and NCUA raised the limit to the greater of $5 million or 100% of net equity. NCUA's reasoning is that one poor lender will be less likely to bring down multiple credit unions, as was the case with Telesis Community Credit Union.
The larger point here is why have a one-size-fits-all limit, at all? Credit unions that regularly buy loans from one another, get to know each other very well. The new rule will require a credit union to walk away from their tried and true colleagues to seek out new credit unions that they do not know.
The issue goes back to regulatory philosophy. Do we manage risk with one size fits all rules that applies to both well run and poorly run credit unions or do we manage risk by permitting well-run credit unions the freedom to incur risks to take advantage of opportunities while curtailing the actions of the poorly-run credit unions until they demonstrate competency?
In other words, do we manage by a bright line check list or through the examination process? Credit unions live in the world of regulatory checklists while banks are given more freedom to exercise business judgment but are disciplined harshly for faults in the examination process.
NCUA is not insensitive to this issue and tries to compensate through a waiver process. NCUA gives regional directors the power to grant a waiver of the single originator restriction. NCUA has used the waiver process in other lending issues, particularly in business lending, and most notably in the personal guarantee requirement.
However, the waiver process itself is often the impediment. It takes time and the delay often kills opportunity. It's just hard to believe that there is no credit union in the country that is capable of making lending decisions without the oversight of NCUA. That is the message that NCUA delivers by its waiver laden regulatory approach.
The waiver process inserts NCUA into lending decisions for the credit union. A credit union is a cooperative that is run by the members for the benefit of members. The role of NCUA is not to run a credit union or manage its risk. NCUA is not accountable to the needs of the credit union and its members. The role of NCUA is to rein in poor performing credit unions that pose a risk to the share insurance fund but give well-run credit unions the freedom to make prudent business decisions that will serve their members' needs.
It is quite disconcerting for well-run credit unions to be lectured to by examiners who have never run a credit union and who are demanding they follow rules that often defy common sense and are not intended to meet the needs of the members. This is the atmosphere that is created by a checklist, one-size-fits all approach to regulation.
It is time to re-examine the best approach to regulation to achieve the common goal of a safe and sound credit union industry that serves the needs of members.
Guy Messick is an attorney with Messick & Lauer PC, and general counsel for NACUSO.
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