NCUA Eyes ‘Skin in the Game’ Rule on Loan Participations

The National Credit Union Administration this week proposed a handful of regulatory measures, including new rules on participations that would require residential originators to retain some of the loans they participate out.

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Originators of these loans would have to retain some of the original risk on their balance sheets, holding “skin in the game,” NCUA chairman Debbie Matz told 400 attendees of a credit union trade group meeting. “They cannot solely reap the rewards while exporting [out] all of the risk to other credit unions,” she said.

“Requiring originators to keep ‘skin in the game’ will provide a disincentive for the kinds of reckless behavior that puts the (National CU) Share Insurance Fund at risk,” she said.

The proposal comes as other banking regulators—but not NCUA—are crafting their own “skin in the game” rules requiring originators to retain at least 5% of the risk tied to high LTV mortgages securitized in the secondary market.

However, CUs that sell their loans into the secondary will have to comply with those new rules.

The NCUA proposal also would require new due diligence by participants, including proper review before — and throughout the life of a loan participation.

“It’s crucial for credit unions to be fully aware of the risks before they enter into participation agreements — and to monitor them closely,” said the NCUA chairman.

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Article source: http://www.nationalmortgagenews.com/dailybriefing/2010_436/ncua-residential-originators-1026648-1.html?CMP=OTC-RSS

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