And the Most Important Regulation of the Year Is …

The NCUA saved the best for last when it comes to this year’s regulations. Technology makes it possible for smaller credit unions to gain access to loans and larger ones to sell off excess capacity to an extent that was inconceivable in 1978, when the NCUA wrote its first loan participation rules following congressional action. Between 2015 and 2022 alone, credit unions more than doubled their outstanding balances of indirect loans. The volume of such loans is nearly $300 billion. This increase has been enabled in no small part because of the NCUA’s gradually more expansive reading of its eligible obligation and loan participation regulations. But even as these loans grow in importance, the eligible obligation and loan participation rules (12 CFR 701.22, 701.223) have been the source of confusion among regulators, credit unions and their compliance staff. So, I was more than a little bit pleased when I saw that the NCUA is proposing to update and clarify these regulations. It may sound boring (OK, it is boring), but, all credit unions should take a look at this proposal and weigh in on potential improvements. It could make your credit union more efficient and generate increased liquidity for the industry.

Nothing better illustrates how technology has fundamentally altered the lending landscape since 1978 than the good old fashioned car dealership. First, let’s keep in mind that credit unions have always been limited to purchasing loan participation and eligible obligations from eligible organizations including other credit unions, banks and government agencies. In the old days, let’s say about 15 years ago, the NCUA was concerned about the safety and soundness issues raised by the increased reliance by some credit unions on indirect lending relationships. And who could blame them? There was once a local car dealer who ran a radio spot in which he bragged about getting a loan for a dead consumer. The NCUA could and did limit indirect lending by mandating that credit unions make the ultimate underwriting decision as to whether to get a car loan. Otherwise, the participating credit union would simply be buying a loan from the car dealership – not exactly an eligible organization.

But in 2015, the NCUA made an important distinction.  It ruled that a broader interpretation of the loan participation rule is appropriate where a retailer – in my example, the car dealership – is acting as an agent of an FCU or other organization and is simply performing an administrative function of processing the loan for the FCU. For this exception to be valid, the loan had to meet the criteria pre-approved by the credit union and the sales contract needed to be assigned to the FCU “very soon” after it was signed by the borrower.

Today there is not a credit union leader reading this article who hasn’t been approached by a lending platform offering to provide it with loans that meet its criteria. These platforms are legal because of this opinion. But, despite its importance, it has never been formally codified into the NCUA’s regulations. This proposal would change that.

This is just one example of the subtle clarifications that the NCUA is proposing. For example, it’s amending the key regulations to eliminate confusing, some might say contradictory, language. It’s also suggesting changes to better clarify the distinction between loan participations and eligible obligations. Finally, it is suggesting that credit unions no longer be barred from purchasing participations based on their CAMEL ratings.

I have no doubt that within another seven years, curmudgeons will once again be advocating for changes to these regulations. But that’s fine. Technology will continue to change the way credit unions conduct business and there are few things as basic to the business as the ability to buy and sell loans. In the meantime, this is your opportunity to clear away some of the weeds and make these regulations as useful as possible.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.