Proposal seeks to open door wider for credit unions to partner with fintechs in lending

Providing additional flexibility for credit unions to use “advanced technologies and opportunities” in lending that is offered through financial technology (fintech) firms is the stated goal of a proposed rule issued Thursday by the federal credit union regulator.

The proposal issued unanimously by the three-member National Credit Union Administration (NCUA) Board would amend the agency’s rules about purchase of loan participations and the purchase, sale, and pledge of eligible obligations and other loans (including notes of liquidating credit unions). The proposal was issued with a 60-day comment period, which commences once the proposal is published in the Federal Register.

In addition to streamlining access by credit unions to fintech tools, the agency said, the proposal would add new provisions about indirect lending and indirect leasing arrangements to credit union members.

“The Board also believes the proposed changes would increase FICUs’ (federally insured credit unions’) ability to engage in lending arrangements with other financial institutions and third parties, including fintech companies providing lending services, expanding their access to diverse loan origination channels, new markets and potential new services to their members,” the agency said in its proposal.

More specifically, the agency said, the proposal clarifies that a FICU engaged in an indirect lending relationship can meet the definition of “eligible organization” under NCUA regulations, provided the FICU meets certain conditions. Among them is that a FICU would be considered the originating lender and meet the definition of an “eligible organization” if the FICU makes the final underwriting decision regarding the loan, and the loan is assigned to the purchaser very soon after the inception of the obligation to extend credit.

Among other things, the proposal would also:

  • For federal credit unions (FCUs), remove the CAMELS ratings and well-capitalized requirements under the regulations for FCU purchases of certain non-member loans from FICUs.
  • Narrow the application of the 5% limit on the purchase of eligible obligations to notes of a liquidating credit union.
  • Add safety and soundness requirements to agency rules concerning the purchase of eligible obligations, to offset risks associated with removing the CAMELS and well-capitalized requirements, and narrow the application of the 5% limit to notes of liquidating credit unions. Safety and soundness and compliance requirements would apply to all FCUs engaged in the purchase of eligible obligations and notes from a liquidating credit union, the agency said.
  • Revise the definition of an eligible obligation under the rules to clarify the distinction between transactions treated as loan participations and those treated as eligible obligations.
  • Revise the applicability of the 5% limit from covering the purchase of most eligible obligations to only “notes” purchased by an FCU from a liquidating credit union.
  • Revise the “grandfathered purchases” section of current rules to include eligible obligation purchases that were executed before the effective date of this proposed rule (if adopted) and complied with the rules at the time the transaction was executed, subject to safety and soundness and compliance considerations.

The proposal also imposes some safety and soundness requirements on FCUs when selling eligible obligations, requiring the credit unions to obtain a legal review and assessment of all applicable loan sale agreements or contracts to protect the FCU’s legal and business interests; and to identify the specific loans being sold either directly in the written loan sale agreement or through a document that is incorporated by reference into the loan sale agreement.

Proposed Rule, Parts 701 and 714, Financial Innovation – Loan Participation, Eligible Obligations, and Notes of Liquidating Credit Unions