The National Credit Union Administration board voted unanimously to advance a proposed rule that would loosen existing regulations and allow credit unions to participate in or purchase more member loans from fintech companies.
The current regulations only allow a federal credit union to purchase loans made to its members from any source if those loans amount to less than 5% of the purchasing credit union's unimpaired capital and surplus.
Board member Rodney Hood said there are several exceptions to the cap, "but they are cumbersome to understand and impose a high regulatory burden."
Hood said the proposed changes would instead allow credit unions to establish their own policies to govern their due diligence and risk management practices regarding the purchases, including establishing their own risk limits.
"I am a believer in a principles-based approach to regulation," Hood said. "Focusing on the credit decision and who is making it is a deciding factor under the proposed rule. I like the idea that the onus is on the credit decision and linking it to the origination process."
NCUA Chairman Todd Harper said since the 2013 loan participation final rule went into effect, the NCUA has received several inquiries from federal credit unions, fintech companies and other parties expressing confusion about how to interpret the rule. He said this confusion has led to inconsistent reporting of loan interests by federal credit unions and uncertainty about which regulations apply to which transactions.
"Credit unions should recognize and harness the potential opportunities fintechs may offer them. However, we must also acknowledge the potential risks they pose to credit unions, their members, and the system and develop appropriate guardrails. This proposed rule strikes that balance," Harper said.
The proposal comes at a time when credit unions are losing market share to fintech companies. Hood said that according to TransUnion, fintech loans make up 41% of all unsecured personal loan balances, up from 5% of outstanding balances in 2013. During that same period, the credit union market share for unsecured personal loan balances declined from 31% in 2013 to 21% in 2021.
"Our current regulations have prescriptive limits for credit unions being able to compete in this market, and if changes are not made to the regulations, credit unions may never be able to regain their presence in the new normal of lending," Hood said.
The proposed rule would also remove the requirement for certain credit unions to obtain NCUA approval to purchase nonmember loans from other federally insured credit unions. Currently, only credit unions rated a Camels 1 or 2 and classified as well capitalized can buy those loans without prior NCUA approval.
Under the new rules, any credit union would be able to purchase eligible obligations after establishing sound underwriting policies but without having to send in a written request for approval.
Vice Chairman Kyle Hauptman said businesses must innovate to stay relevant, and credit unions are not usually top of mind for most fintechs.
"So anything their regulator can do to improve the process of working with them is critical. At the very least, we do not want fintechs — or any service provider — choosing not to work with credit unions because their regulator makes it unnecessarily difficult," he said.
The proposed rule will be open for a 60-day comment period following its publication in the Federal Register.
