Compliance Blog

With the newest round of economic impact payments hitting members’ accounts, some credit unions are finding that they have too much liquidity and are starting to invest in loan participations or eligible obligations. However, if the credit union is purchasing from banks or CUSOs, the loans may not meet the NCUA maturity limit requirements, so can the credit union proceed with the purchase? Well, it depends.

Loan Participations

Section 701.22(b) states that a credit union may purchase a participation interest in a loan, “if the loan is one the purchasing credit union is empowered to grant” and “the purchase complies with all regulatory requirements to the same extent as if the purchasing federally insured credit union had originated the loan.” The regulation would allow a credit union to purchase a loan participation only if the loans were ones the credit union was empowered to grant, which would restrict the loans to the NCUA maturity limits.

This means the allowed maturity limit will depend on the type of loans the credit union is participating in.

Section 701.21(c)(4) states that “the maturity of a loan to a member may not exceed 15 years,” unless the loan falls under an exception. Section 701.21(f)(1)(iii) allows a credit union to originate a loan with a 20 year maturity if the loan’s purpose is to purchase a mobile home used as a members residence, a second mortgage for a residential dwelling, or to “repair, alter or improve the residential dwelling.”

Section 701.21(g) states a credit union may make residential real estate loans with maturities of up to 40 years if the dwelling is or will be the principal residence of a member.

Legal Opinion 93-1017 explains that section 723.1(c)(1) requires any business loan a credit union makes to be in accordance with the requirements set by section 701.21, including the 15-year maturity limit.

Eligible Obligations

However, if the credit union is purchasing the loans as an eligible obligation (not a participation), section 701.23(b) sets out a two prong test for one of the ways a credit union may purchase a loan or group of loans of its members:

“(A) They are loans it is empowered to grant, or

(B) they are refinanced with the consent of the borrowers, within 60 days after they are purchased, so that they are loans it is empowered to grant”

Section 701.23(i) provides temporary relief due to COVID-19 and allows a credit union to purchase eligible obligations “pursuant to paragraph (b)(1)(i) and (b)(2)(i) of this section without regard to whether they are loans the credit union is empowered to grant or are refinancing to ensure the obligations are ones the purchasing credit union is empowered to grant.”

Letter to Credit Union 20-CU-09 and the Examiners Guide reiterate that credit unions may purchase loans “without regard to whether the purchasing credit union is empowered to grant such loans.” The guidance seem to suggest that the two-prong test is waived for purchases made through December 31, 2021 (the temporary rule extended the expiration date from December 2020 to December 2021), and the regulation would allow a credit union to purchase any loans (even those with a maturity limit greater than set out in the FCU Act), as long as the credit union is well-capitalized, and the loans are purchased from a federally insured credit union.

The eligible obligation and loan participation rules are complex, and we have an article, Diversifying Your Credit Portfolio: Two Baskets Are Better Than One, to help credit unions get a better understanding on the regulation.

Another thing to note, the NCUA FAQs remind credit unions that the purchased loans are still “subject to safety and soundness considerations,” and credit unions should do proper due diligence prior to the loan purchases.