Compliance Outlook

NCUA Loan Participations

Loan Participations

Loan participation rule amends to NCUA 701 Organization and Operations of Federal Credit Unions and 741 Requirements for Insurance.

Effective date – September 23, 2013

Loan Participations

Loan participation rule amendments include:• New definitions; • Purchase, sale and pledge of eligible

obligations; • Guidance for the purchase of assets

and assumption of liabilities; and • Insurance requirements.

Loan Participations

With loan participations the borrower must be a member of one of the purchasing federal credit unions before the purchase is made.

Loan ParticipationsDefinitions

1. Originating Lender - A federally insured credit union may purchase a participation in a loan only from the participant with which the borrower initially or originally contracts for a loan.

2. Loan Participation - The originating lender must participate in the loan throughout the life of the loan.

3. Associated Borrower - any borrower with a shared ownership, or investment interest in a business or commercial endeavor with the borrower. This includes guarantors, co-signors, major stakeholders, owners, investors, affiliates and other parties who have influence on the management, control, or operations of the borrower.

Loan Participations

Revised section §701.22(b):A FICU may only purchase a loan participation if the seller is an eligible organization and if the loan is one the credit union is empowered to grant under applicable law and its own internal loan policies.

Loan Participations

Continuing Participation Interest:• The originating federally insured

credit union must retain at least 10% of the outstanding balance of the loan through the life of the loan.

• Another originating lender’s continuing interest must be at least 5%.

Loan Participations

Loan Participation Purchases:• FICU can purchase a participation in a

loan it is empowered to grant, even if it does not generally originate that type of loan.

• FICU must establish prudent underwriting standards for loan participations and conduct appropriate due diligence before purchasing a loan participation.

Loan Participations

Loan Participation Agreement:• Be properly executed; • Be properly authorized by the federally

insured credit union’s board of directors or, if the board has delegated in its policy, a designated committee or senior management official;

• Be retained in the federally insured credit union’s office (original or copies).

Loan ParticipationsLoan Participation Agreement:

• Identify the specific loan participation(s);• Originating lenders retained interest in the

loan;• Location & custodian for original loan

documents;• Financial and performance information; • Duties and responsibilities of the originating

lender, servicer, and participants; • Circumstances and conditions under which

participants may replace the servicer.

Loan Participations

Concentration Limits:• Aggregate amount of loan participations

purchased from any one originating lender cannot exceed the greater of $5,000,000 or 100% of the FICU’s net worth.

• Aggregate amount of loan participations purchased with respect to a single borrower, or group of associated borrowers cannot exceed 15% of the FICU’s net worth.

• FICU must establish self-imposed limits on the amount of loan participations that it may purchase by loan type.

Thank you for joining me for this review of the NCUA’s Loan Participation Rules

Stay Tuned…Shawn Wolbert, CIA, CUCEDirector CU System Relations

101 S. Washington Square, Suite 900Lansing, MI 48933-1703(800) 262-6285 Ext. 486(734) 658-5427 MobileFollow me on Twitter – Shawn Wolbert @ Go2CUGuru