Proposed Changes to Rules for Loan Purchases, Sales and Participations by Massachusetts-Chartered Credit Unions

Last month, the Division of Banks issued proposed changes to its parity rules intended to clarify and arguably expand the powers of Massachusetts-chartered credit unions to buy, sell, pledge and participate in a variety of loans.  The proposed changes are subject to legislative review but if not vetoed by the Legislature will take effect in early August.  While the changes are welcome, they fall short of the broad loan portfolio purchase and sale powers that many believe are needed to address excess liquidity at many Massachusetts CUs.  Most importantly, the proposed changes make clear that a Mass-chartered credit union may purchase loans from another credit union only if the borrowers on those loans either are (A) members of the purchasing institution or (B) are within the buyer’s field of membership and within 60 days after purchase of their loans actually become members.  In some cases, a Mass CU must obtain approval from the Division of Banks before engaging in these activities, in other cases it must give the Division notice, and in others no approval or notice is needed.

Here are the key points:

1. A Mass-chartered CU may purchase, sell or pledge any consumer or mortgage loans or sell or purchase participating interests in consumer or non-residential real estate loans.  Loan purchase, sale and participation transactions by Mass-chartered CUs must follow NCUA rules.  This requires that (a) the loans be the obligations of the purchasing CU’s existing members or those eligible to become members, who actually become members of the purchasing institution within 60 days after the loans are acquired, (b) the purchaser must have in place and follow a board-approved policy on such transactions, (c) the transaction is evidenced by a written agreement, (d) the loan terms comply with applicable legal requirements for Mass-chartered CU loans, and (e) the aggregate amount of loans purchased is limited to 5% of the CU’s capital and surplus, 10% for consumer loan participations and 10% for non-residential mortgage loan participations.
2. Loan purchases can be made from other Mass-chartered CUs and other NCUA-insured CU’s if the loans conform to Massachusetts CU legal requirements, or are made to conform within 60 days after purchase.
3. Loan sales can be made to anyone, including non-CUs, so long as the board or credit committee approves it and the transaction is documented in writing.
4. Loan pledges can be made to anyone, provided there’s board or committee approval, and the transaction is properly documented, with the CU retaining the loan documents.
5. If the CU is well-capitalized (7% or better capital ratio), it may engage in loan purchases by giving notice to the Division of Banks.
6. If the CU is not well-capitalized, it may engage in loan purchases only if it applies for and obtains approval from the Division of Banks.
7. If the CU is well-capitalized and has adequate or strong management (rated 1 or 2), it may purchase conforming auto, credit card, student or mortgage loans without notice to the Division of Banks.

It remains the Division’s position that indirect auto lending and leasing is not the purchase of those obligations and thus does not require notice to or approval by the regulator.

The Division has for now rejected the argument that loan purchases should be permitted under the investment rather than lending authority of Massachusetts CUs, which would eliminate the requirement that the loan borrowers be members of the purchasing CU or within its FOM.  This is consistent with the position taken by the NCUA for federal credit unions, and is not likely to change absent action by the Legislature to amend Chapter 171 of the General Laws.

We’ll keep you updated on any developments.