Compliance Blog

Happy Wednesday, Compliance Friends! It was nice seeing some of you a couple weeks ago at Compliance School!

Recently I’ve received a couple questions regarding participation loans, so I figured it would be a good idea to compose a blog on the topic.

Section 701.22 of NCUA’s regulations discusses loan participations. Section 701.22(b) states:

“A federally insured credit union may purchase a participation interest in a loan from an eligible organization only if the loan is one the purchasing credit union is empowered to grant…”

Section 701.22(a) defines an “eligible organization” as “a credit union, credit union organization, or financial organization.”

Additionally, section 701.22(b)(1) goes on to provide that “the purchase [must comply] with all regulatory requirements to the same extent as if the purchasing federally insured credit union had originated the loan…”

Furthermore, section 701.22(b)(2)-(5) also requires the following conditions to be satisfied:

• There is an executed written loan participation agreement between the originating lender and the purchasing federally insured credit union.
• The originating lender maintains an interest in each of the participation loans.
• Before the purchase of a participation interest, the borrower becomes a member of a participating credit union.
•  “The purchase complies with the purchasing federally insured credit union’s internal written loan participation policy.”

Regarding that last bullet point, section 701.22(b)(5) states that the internal loan participation policy must:

• Establish loan participation underwriting standards.
• Establish limits on the aggregated amounts of purchased loan participations.
• Establish limits, by each loan type, on the amount of loan participations that may be purchased.
• Establish a limit of 15 percent or less on the aggregated amount of loan participations that may be purchased with respect to a single borrower, or group of associated borrowers.

Section 701.22(d)(1)-(3) discusses loan participation agreements and provides that it must be properly executed, properly authorized, and retained in the FICU’s office (which can be either an original or a copy). Furthermore, section 701.22(d)(4) discusses the following required provisions:

•  Identify specific loan participations being purchased.
• The originating lender’s interest that they will retain in the participation loan.
• The location of the original loan documents and their custodian.
• How to gain access to financial and other performance information, including information about the servicer and the borrower.
• An explanation of the duties and responsibilities of all participations with respect to all aspects of the loan.
•  When participations can replace the servicer.

This NAFCU blog post also provides some helpful information regarding loan participations. Per the blog, “[t]he 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.”

Additionally, this NAFCU blog post provides a helpful breakdown of FCU maturity limits. Section 701.21(c)(4) discusses loans with a maturity limit of 15-years, section 701.21(f) discusses 20-year loans and section 701.21(g)(1) discusses long-term mortgage loans. The credit union should review that the loan conforms with the maturity limit requirements.

Moreover, credit unions that are interested in selling loan participations may want to review the preamble to this NCUA final rule that discusses purchasing and selling loan participations, and provides that:

“…at a minimum, the seller in a loan participation agreement must be an eligible organization. The purchasing participants, however, may, but are not required to, be eligible organizations.”

Based on the above, a credit union has more freedom in selling a participation loan since NCUA has stated the purchasing organization is not even required to be an eligible organization.

I hope this helps your credit union when looking into loan participations. Credit unions may want to note that section 701.22 contains further detail. Additionally, NCUA proposed potential changes to the loan participation rule as can be read about here in this Regulatory Alert.

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