WASHINGTON (11/2/15)--Can a federally insured credit union be considered an originating lender when it generates a loan through an indirect lending arrangement with a retailer?
The question involves participation lending, which is when multiple lenders collaborate to make a loan to a single borrower. And the answer represents months of digging and analysis from CUNA and the Georgia Credit Union Affiliates on behalf of credit unions who need to know.
Cindy Connelly, senior vice president at the Georgia Credit Union Affiliates, said a credit union was told to stop purchasing indirect car loans from a bank. This was because the car dealership used for the loans used a retail sales agreement, not a bank loan agreement, so the dealership was considered the originating lender.
“We spent months, along with CUNA staff, trying to educate NCUA on the indirect process… we were concerned that the interpretation would cause havoc to credit unions and stop indirect loan participations,” Connelly said. “We finally realized that we had to escalate the issue to NCUA leadership. We not only wrote asking for clarification, but also held a conference call with NCUA attorneys, pointing out other regulations that seemed to acknowledge indirect lending and this could potentially cause undue safety and soundness concerns if credit unions could not share risk.
“We were finally able to get clarification that allowed what was legal before the loan participation rule change to continue,” Connelly added.
CUNA and the Georgia league received their answer in NCUA legal opinion letter 15-0813.
The answer? A broader interpretation from the NCUA on the definition of originating lender. When a retailer in an indirect lending arrangement is performing the loan-processing duties, the retailer is considered an extension of the credit union’s lending operations and is only acting as a facilitator in processing the loan.
This means the credit union in the above example is considered the originating lender.
However, the NCUA pointed out that, in order for the credit union to be considered the originating lender, the retailer must quick assign over the loan to the credit union after it is signed by the borrower.
This answer brings to mind another question, also answered by the NCUA. Can federally insured credit unions purchase a loan from the arrangement listed above?
Per the NCUA, federally insured credit unions may purchase an interest in the loan participation, but only from the lender that originated the loan.