Loan participations are helping credit unions manage liquidity and interest-rate risk, and address problems with the member business lending cap. More than 1,300 credit unions currently engage in loan participations, about half of which involve member business loans.
Engaging in loan participations means your credit union must pay attention to a lot of details—not only those found in regulations but also those needed for sound business practices.
A participated loan is owned proportionately by all the participants, who typically divide the cash flow in proportion to their ownership share. No one participant has priority over the others, and no “right to transfer” exists for the entire loan unless all participants agree.
Current regulatory requirements
Section 701.22 of NCUA’s Rules and Regulations defines a “participation loan” as “a loan where one or more eligible organizations participate pursuant to a written agreement with the originating lender.”
The originating lender is the credit union that has the loan contract with the member. Eligible organizations are defined as federal and state-chartered credit unions, credit union service organizations (CUSOs), federally insured banks and thrifts, and any state or federal government agency. Trade associations are not eligible organizations.
The loan participation requirements in Section 701.22 as of early 2013 include the following:
In December 2011, NCUA proposed a number of changes to Section 701.22, some of which were highly controversial. The agency’s proposed amendments included:
NCUA also proposed to clarify the distinction between the purchase, sale, and pledge of eligible obligations for federal credit unions under Section 701.23 (where the borrower must be a member) and loan participations under Section 701.22.
The agency is expected to adopt changes to its loan participation rules in 2013, although it has made clear it won’t finalize the concentration limits as proposed.
Elements of a good policy
Whether or not NCUA imposes additional requirements, a good policy for a credit union wanting to purchase loan participations should:
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