How the NCUA Should Approach MBL Participations

Albert Einstein famously noted that insanity is doing the same thing over and over again and expecting different results. In other words, it makes no sense to constantly repeat a process if you are already certain what the outcome will be.

 When banking regulators began encountering participations that were in several institutions, it became clear that it didn’t make sense to review the same participation over and over again in each bank; but rather, review the participated loan once and have the conclusion apply to all institutions that hold a piece of that participation. This resulted in the creation of a Shared National Credit Program, often referred to as an abbreviated acronym, SNC, pronounced “snick.”

 The Shared National Credit Program was established in 1977 by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency to provide an efficient and consistent review and classification of any large syndicated loan. Today, the program covers any loan or loan commitment of at least $20 million that is shared by three or more supervised institutions. The agencies' review is conducted annually. This program is logical and efficient, because it saves several regulators time by not having to review the same loan over and over again. But more importantly, it keeps regulators’ findings and conclusions consistent, and it prevents them from dictating opposing opinions to different institutions.

 The NCUA does not participate in the Shared National Credit Program, nor do they maintain their own program to handle syndicated loans.  Not only could the NCUA save precious manpower by establishing such a program, they could devote special expertise to an area where they are concerned there is greater risk.

 I would propose the NCUA setup a single committee to review loan participations, with those findings and conclusions applying to all institutions holding part of the participated loan. I think the dollar amount of the participation is irrelevant, and really, any loan shared by three or more institutions should be subject to review by this committee.

 Next, I would propose that any participation review committee be staffed by both members of the NCUA and State regulators; perhaps appointed by the National Association of State Credit Union Supervisors (NASCUS).

 I would also propose the review committee engage with the principal underwriter and/or servicer to carryout its review. For example, if a CUSO is underwriting and servicing the participation, the regulators would work with the CUSO to complete the review and address their concerns to the CUSO. The goal is to regulate the risk at its source and not by proxy.

 This in no way removes the responsibility of a credit union to maintain a participation policy and complete its own analysis before purchasing a participation. Any credit union that purchases participations should demonstrate a sound understanding of the activity they are engaging in.

 The NCUA could learn from their bank regulator counterparts, and reduce redundancy by only having to review a participated loan once. Moreover, the NCUA can assure an examiner, with the right set of skills, is reviewing the loan. By mimicking the Shared National Credit Program, the NCUA would have a way to consistently communicate their findings and engage directly with the originator or custodian of the participations. This would ease the burden of regulation on both the NCUA and all the institutions holding a participation, so it seems to be a win-win strategy.