The National Credit Union Administration (NCUA) Board recently
approved a final rule clarifying stipulations to afford credit unions increased
flexibility to use advanced technology for loan originations, indirect lending
and more.
The rule allows federally insured credit unions (FICUs) to
engage in indirect lending arrangements with fintechs and other third-party
entities, such as credit union service organizations, and enter into participation
loan agreements with other institutions, which would serve as the originating
lenders.
“This new rule codifies several long-standing supervisory
guidance letters on third-party due diligence, indirect lending, and loan
participations, and it shifts the regulatory framework from a prescriptive
structure to a principles-based system,” NCUA Chairman Todd Harper said in a
statement. “However, with greater freedom also comes greater responsibility.
Managers and boards of directors choosing to use this new rule, therefore, must
ensure their third-party due diligence and vendor management policies are
updated, followed, and reflect the size and complexity of their activities and
risk levels.”
Among other provisions, the rule offers clarifying and
conforming amendments to remove the ratings assessing an FICU’s Capital adequacy,
Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk (CAMELS),
as well as requirements to be considered well-capitalized for federal credit
union purchases of certain non-member loans from FICUs.
The rule narrows the application of the 5 percent limit on
the purchase of eligible obligations to cover only the purchase of notes of
liquidating credit unions. It also adds safety and soundness requirements pertaining
to the purchase of eligible obligations, to offset risks associated with
removing the CAMELS ratings and well-capitalized requirements.
Credit union advocates have expressed opposition to the
rule, asserting the rule’s language is too broad to create the intended
flexibility and the NCUA should not create a separate indirect lending rule and
should follow a principles-based approach.
Trade advocates also argue credit unions engaged in indirect
lending should not be required to be actively involved or consulted when a
facilitating partner extends credit to borrowers on behalf of a credit union or
to limit the number of permissible facilitating partners.
“NAFCU has consistently encouraged the NCUA to eliminate a
variety of unnecessarily prescriptive regulations and return key management
decisions to credit unions,” National Association of Federally-Insured Credit
Unions (NAFCU) Regulatory Affairs Counsel Dale Baker wrote in a comment letter
to NCUA. “And NAFCU strongly supports much of the proposed rule that would
accomplish that goal. Still, credit unions can prudently engage in a broader
range of loan participation and eligible obligation activities than the
proposed rule would permit. Therefore, NAFCU encourages the NCUA to not
undermine the flexibility and autonomy it intends to provide credit unions by
prescriptively defining or otherwise limiting key aspects of loan participation
and eligible obligation activities.”
In addition to discussion of the final rule, during its
September meeting, the NUCA Board received a briefing on the Share Insurance
Fund (SIF), informing them the fund’s net income is $37.1 million with an
equity ratio of 1.27.