NCUA has issued a final rule, which took effect 7/25/2013, that revises the existing loan participation rule and makes some corresponding and clarifying changes to the eligible obligation rule and the rule regarding purchases and assumptions. The bulk of the changes apply to the loan participation rule and extend the coverage of this rule to federally insured credit unions, as well.

LOAN PARTICIPATION RULE, PART 701.22

Definitions, Section 701.22(a)

There are several changes and an addition to the definitions under the loan participation rule:

A new definition has been added for an “associated borrower.” While this definition is similar to the definition of an “associated member” in the Member Business Loan rule (Part 723), this new definition provides examples of the types of parties that would be considered associated borrowers;
The definition of “credit union organization” has been revised to clarify that it includes CUSOs invested in or loaned to by federally insured, state chartered credit unions, as well as ones invested in or loaned to by federal credit unions;
The definitions of “loan participation” and “originating lender” have been revised to clarify that the lender that originated the loan for which participation interests are being sold must participate in the loan for the entire life of the loan. This means that only lender that initially originates a loan may sell participation interests in that loan to other lenders. This means that should a federally insured credit union experience liquidity needs it could resell its participation interest back to the originating lender, to another lender within the same participation group, or it could allow another lender to assume, in whole, its participation interest. The participating credit union could not, however, resell its participation interest to a party outside of the above options.

Requirements for Loan Participation Purchases, Section 701.22(b)

A federally insured credit union can only purchase a loan participation if the seller is an eligible organization and if the loan is one the purchaser is empowered to grant under applicable law and its own internal policies. As part of its internal policies, the credit union board must adopt a written loan participation policy. The revisions to this section specify a number of issues that must be addressed in this policy:

Underwriting Standards – The new rule continues to permit federally insured credit unions to purchase participation interests in loans they are empowered to grant even if they don’t actually originate these types of loans. In addition, a credit union can identify one set of underwriting standards for a particular loan type that it originates and establish a different set of underwriting standards for participation interests it may purchase in the same loan type. The new rule emphasizes that a purchasing credit union must conduct appropriate due diligence before purchasing a loan participation interest and may do so by relying on the services of an outside qualified third party that is not affiliated with the loan. However, the credit union may not rely on the originating lender’s due diligence; and
Concentration Limits – This was the most controversial part of the proposed rule and NCUA has provided for a more generous limit under the final rule. First, there is now a single originator concentration limit that must be identified in the credit union’s written policy. A federally insured credit union may not purchase loan participation interests from any one originator if the aggregate amount of the interests exceeds $5 million or 100% of the credit union’s net worth, whichever is more. Second, the written policy must also address single borrower concentration limits. The final rule states that the aggregate amount of loan participations that may be purchased from a single borrower or group of associated borrowers cannot exceed 15% of the purchasing credit union’s net worth. A credit union could always establish a lower single originator limit or a lower single borrower concentration limit, if desired. Lastly, the credit union must establish its own limits on the amount of loan participations that it may purchase by loan type, not to exceed a specified percentage of the credit union’s net worth. As a final note, a credit union that is in violation of these new limits on the July 25th effective date will not be required to divest any of its existing loan participations. However, the credit union will not be able to purchase any additional participation interests until its portfolio complies with the new concentration limits.

Waivers, Section 701.22(c)

Federally insured credit unions may request waivers from both the single originator concentration limit and the single borrower concentration limit. State chartered credit unions must receive approval from NCUA along with concurrence from the appropriate state supervisory authority. The final rule states that the NCUA regional director will notify the credit union of its decision within 45 calendars of the receipt of a fully completed waiver request. Waiver determinations will be appealable within 60 days to the NCUA Board. This section provides detailed information about what should be included with the waiver request. Lastly, this section now clarifies that if a waiver has been obtained by the originating credit union, it is not necessary for a participating credit union to also obtain a waiver. However, if the originating credit union has not obtained a waiver, each participant needing a waiver will have to obtain its own waiver.

Minimum Requirements for a Loan Participation Agreement, Section 701.22(d)

Just as with the loan participation policy, the new rule requires specific items be addressed in the written loan participation agreement between the seller and purchaser. In general, the agreement should clearly identify the roles, duties and obligations of the originating lender, the servicer and the participants. Specifically, the agreement must contain:

A provision that requires the originating lender to retain an interest equal to 10% of the outstanding balance, if the originating lender is a federally chartered credit union. All other types of eligible originating lenders need only retain a minimum of a 5% interest in the outstanding balance. This minimum, however, could be higher depending on the provisions of the applicable state law;
The servicing responsibilities for the loan, including disclosure requirements regarding the ongoing financial condition of the loan, the borrower, and the servicer; and
A listing of each loan, if the purchase involves multiple loans.

This section also clarifies the existing requirement that federally insured credit unions may not purchase a participation certificate in a pool of loans.
PURCHASE, SALE AND PLEDGE OF ELIGIBLE OBLIGATIONS, SECTION 701.23
There are no significant changes to this section. New introductory text has been added to clarify the difference between a loan participation and an eligible obligation. In addition, the introductory text includes the exception that permits well-capitalized, federally chartered credit unions to buy whole loans from other federally insured credit unions without regard to whether the loans are eligible obligations of the purchasing credit union or loans to members of a liquidating credit union.
PURCHASE OF ASSETS AND ASSUMPTION OF LIABILITIES, PART 741.8
New language has been added stating that separate approval from an NCUA regional director is not required under this section when a federally insured credit union purchases a loan participation that complies with the loan participation rule.
LOAN PARTICIPATIONS, SECTION 741.225
The section now extends the coverage of the loan participation rule to federally insured state chartered credit unions.