On Compliance: NCUA financial innovation proposal will modernize indirect lending
The removal of the 5% cap on eligible obligations also has the potential to be a game-changer.
In December, the National Credit Union Administration board issued a proposed rule entitled Financial Innovation: Loan Participations, Eligible Obligations, and Notes of Liquidating Credit Unions that should, once finalized, make it easier for credit unions to partner with financial technology companies in indirect lending relationships.
The proposed rule does not necessarily break new ground because many credit unions already engage in indirect lending with fintech companies, however, the updated regulation would codify longstanding NCUA guidance; eliminate the existing regulatory cap on credit unions’ purchases of “eligible obligations,” i.e. a loan made by an unrelated lender that the credit union later acquires; and clarify when the credit union is considered the “originating lender” in an indirect lending relationship.
NCUA last updated these regulations 10 years ago when app-based financial services were less advanced. The agency is expected to issue a final rule on financial innovation before the end of this year.
App-based financial services in action
Recently, many credit unions, including many of my clients, have partnered with fintech companies like Upgrade and Upstart to reach borrowers who may not have previously considered seeking a loan from a credit union. These fintech companies typically use mobile app-based platforms to connect individuals with credit unions they are eligible to join. The credit union then makes a loan—such as an auto loan or a signature loan—to the member through the app using the credit union’s own underwriting standards that the fintech has agreed to follow.
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