loan participations - andy keeney

Police Officer’s Credit Union Conference

June 2012E. Andrew Keeney, Esq.

kauf

CA

N.c

omYour only criteria for selecting a law firm should be its commitment to do all the right things to help you succeed. We can. And we will.

150 West Main Street, Suite 2100 Norfolk, VA 23510 kaufCAN.com T (757) 624.3000 F (757) 624.3169

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E. Andrew KeeneyPartnerT (757) 624.3153F (757) [email protected]

Andy currently serves as the General Counsel for numerous credit unions, he is an approved and preferred special counsel for several credit union insurance companies and has been a specially retained attorney by NCUA. Additionally, Andy’s practice involves a range of commercial real estate services from zoning to representation provided in connection with the leasing or purchase and/or sale of commercial real estate. His finance experience includes real estate development activities and workouts of troubled loans.

practice areas •LenderRepresentation •RealEstateStrategies •Commercial

representative matters •RetainedgeneralcounselforABNBFederalCreditUnion,CreditUnionAutoLoanNetwork(CUALN),Justice FederalCreditUnion,CongressionalFederalCreditUnion,EducationalSystemFederalCreditUnion, BayPortCreditUnion,BelvoirFederalCreditUnionandmanyothercreditunions •AchievedasagentfortheapplicantrezoninginacontroversialapplicationforWal-MartandSam’sClubin Chesapeake, Virginia •ObtainedrezoningforFranciscusCompanyinthefirstage-restrictedcommunityinChesapeake,Virginia •RegionalcounselforSoutheasternPropertyDevelopmentofBirmingham,Alabama •ObtainedspecialzoningcounselforWoodPartnersandtheAltaGreatBridge,AltaReserveandStreetsof Greenbrier developments •RegionalcounselforBonaventureRealtyGroup,awidely-respectedmulti-familyresidentialdeveloper

recognition and honors •Who’sWhoAttorneysintheEast,1996-present •VirginiaSuperLawyers;Law & Politics, 2006 •Who’sWhoinAmerica’sCreditUnions,2008 •VirginiaBarAssociationCommunityServantAwards,2006-present •NationalLeadershipAward,2003 •AmericanCollegeofMortgageAttorneys,1994-present;BoardofRegents,2007-present •CommunityServiceAward,CurrituckCountyBoardofCommissioners


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associations •AmericanBarAssociation •VirginiaBarAssociation •DistrictofColumbiaBarAssociation •AmericanCollegeofMortgageAttorneys •NorthCarolinaBarAssociation •AmericanBarAssociation;CommitteeonCreditUnions;CharterMember •OldDominionUniversityCenterforRealEstateandEconomicDevelopment;ExecutiveCommitteeandAdvisory Board •FairfaxCountyBoardofEqualization;ViceChairman,1992-1993 •UrbanLandInstitute;DistrictCouncilforHamptonRoads,ExecutiveCommittee •CivicLeadership,2000-2001 •BoysandGirlsClubofSouthHamptonRoads;BoardofDirectors,2001-2008 •VirginiaChapterofAmericanPlanningAssociation •LangleyFederalCreditUnion;BoardofDirectors,2006-2008 •DareCountyBoardofAdjustment(Alternate) •WhaleheadPreservationBoard,1997–2004

education •DrewUniversity;B.A.,1973 •AmericanUniversityWashingtonCollegeofLaw;J.D.,1976

press and publication •CreditUnionLegalUpdate-Spring2012 •“NewFASBGuidanceHelpstoClarifyTDRAccounting,”CFOFocus:HotExaminationIssue, Credit Union Management,July2011 •CreditUnionLegalUpdate-Summer2011 •CreditUnionLegalUpdate-Spring2011 •“LegalEagle”Addendum •MortgageDelinquency&CollectionsConference,2010 •CreditUnionLegalUpdate-Spring2010 •GlossaryofRealEstateTerms •E.AndrewKeeneyRe-electedtoBoardofRegentsfortheAmericanCollegeofMortgageAttorneys •CreditUnionLegalUpdate-Fall2009 •CreditUnionLegalUpdate-Winter2009 •CreditUnionLegalUpdate-Summer2008 •CreditUnionLegalUpdate-Winter2008 •CreditUnionLegalUpdate-Summer2007 •CreditUnionLegalUpdate-Winter2007 •CriticalRealEstateIssuesforCreditUnions •28Kaufman&CanolesAttorneysNamedinVirginiaSuperLawyers2006 •CreditUnionLegalUpdate-Spring2006 •CreditUnionLegalUpdate-Fall2005 •CreditUnionLegalUpdate-Spring2005 •CreditUnionLegalUpdate-Fall2004 •CreditUnionLegalUpdate-Summer2004 •CreditUnionLegalUpdate-Autumn2001-present •“CybersquattersInfringeonLocalFinancialInstitutions,”Inside Business,March31,2008,April6,2008 •“UpdatingMemberCreditData,”OnCompliance,CUES,February28,2008 •FederalCreditUnionNewsletter-Spring2001 •PresenteronmajorlanduselawsinVirginiaforNationalBusinessInstitute


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press and publication (continued) •PresenteronzoningandlanduseforLormanEducationalServices •Black’sGuideBoardofAdvisors •Black’sGuideGlossaryofRealEstateTerms,1996,1997&1998 •“WhatHappensWhenaBoardMemberResigns?,”Martindale,July24,2006 •PresenteroninternetpiratingtoVirginiaCreditUnionLeague,Hampton,Tidewater,andRichmondChapters •CriticalRealEstateIssuesforCreditUnions–VirginiaCreditUnionLeague,2007 •Let’sMakeaDeal:ManagingYourRealEstatePortfolio-MarylandD.C.CreditUnionAssociation,2009

CREDIT UNION LEGAL UPDATE spring 2012

Credit Union Mergers vs. Compliance Considerations: An Oxymoron

In today’s economic climate, all credit unions are well advised to stay flexible and seek every opportunity to achieve success

in these difficult financial times. With ever increasing operating and compliance costs, coupled with significantly decreased

member fee income, credit unions considering a merger must be on the alert for the short-term, as well as long-term, impact

of the ever-changing world of consumer compliance rules and regulations.

Unfortunately, many credit unions tend to view a potential merger opportunity as a sign of weakness or an indication that the

credit union has given up on its mission and its members. To the contrary, quite often a credit union merger, and even the

initial discussions with a potential merger partner, represent a well-intended forward thinking and long-term strategic plan and

approach. Often a struggling credit union will face a tough reality – if the struggling credit union stays on its present course

without any remedial action, member service will ultimately suffer. When member service begins to suffer, the members

begin to migrate away from the credit union, seeking more stability and better customer service. No credit union wants to lose

members, and in the current economic climate, very few credit unions can afford to lose members.

PRE-MERGER CONSIDERATIONS

Credit union mergers generally fall into one of two categories. The first is a forced merger that is regulatory in nature and is

driven by the credit union’s regulatory agency.

The second type of merger, and the type of merger that will be the focus of the remainder of this article, is a voluntary,

strategic merger between two willing credit unions. They desire to pool and merge resources to achieve certain efficiencies

with the goal of achieving the ability to provide optimal member service to the collective membership base of the two merging

credit unions.

The benefits of a merger are well documented and include the ability of the surviving entity to take advantage of economies

of scale, administrative and management consolidation, regulatory compliance efficiencies, and other advantages that come

along with a larger membership base. If a credit union is struggling financially, finding a larger, more stable merger partner in

which to merge the credit union can be an attractive methodology for achieving the goal of long-term health of the credit

union and its members. This should not be viewed as a failure or a disappointment to the members. Instead, it can and

should be presented to the existing membership base in a positive light, as a strategic business decision to reposition the

credit union and its members for long-term viability and sustainable success over the long term.

Credit union mergers can also provide for a valuable succession planning tool. For a credit union led by a Chief Executive

Officer with plans to retire in the near future, but without a clear succession plan in place in terms of the credit union’s next-in-

line to become CEO, a potential merger with another credit union that has strong leadership and a well-positioned CEO may

be the best option.

Regardless of the reason for a merger, it is worth noting that the merger process is something that takes planning,

forethought and a good bit of courting between the two potential merger partner credit unions. Typically, the discussions and

preliminary negotiations take place between the CEOs of the potential merger partner credit unions or the CEOs and

respective Chairmen of their Boards. At this preliminary stage, the two potential merger partners need to get a sense of each

other’s philosophies, core and fundamental beliefs, and strategy for success going forward. There are no rules or regulations

that would specify how long the courtship period between two potentially interested credit union merger partners should last.

These courtships can last for six months or even two years (or more) depending on the situation and the process, and either

is perfectly normal.

Once the CEOs of the potential credit union partners have agreed in principal that they would be willing to merge the entities,

the next major step is taking the concept and preliminary details of the proposed merger plan to the respective credit unions’

Boards of Directors. This process can also be time consuming. It will require education of each Board such that each is fully

apprised of the motives and objectives behind the potential merger and the expected benefits and efficiencies that will result.

A thorough presentation to the Board by the credit union’s senior management team is a must.

Once each respective credit union has "kicked the tires" of the other potential merger partner credit union and each are

satisfied with the results of such due diligence inquiries, the parties then must adhere to and obtain preliminary regulatory

approval from the applicable regulatory agency or agencies. Depending on the structure of the two merging credit unions (i.e.

whether they are both federally-chartered credit unions or if one is a federally-chartered credit union and the other a state-

chartered credit union), the rules are slightly different. Preliminary regulatory approval is the precursor to taking the potential

merger to a vote of the members. Often a major undertaking based on the size of the merging credit unions, the member vote

is essential. Much like the initial presentation to the Board, the presentation to the members must be strategic and centered

on the positive and beneficial nature of the intended and expected results of the merger. Without the requisite member

approval vote, the merger is dead in the water. Finally, once the members have voted to approve the merger, the respective

Boards of the merging credit unions may begin to integrate and initiate strategic long-term plans and decisions, and must also

obtain final regulatory approval.

The NCUA (for federally-chartered credit unions) publishes a Credit Union Merger and Conversion Manual that walks a credit

union through the regulatory process and requirements for consummation of a credit union merger. The document is

available by clicking here. It provides a valuable resource to credit unions that are exploring a potential merger and/or moving

forward with merger discussions and negotiations. The guide provides useful forms for credit unions to utilize as they

navigate the merger landscape. Of course, the involvement of experienced advisors, including attorneys, accountants, and

other business advisors, who understand and have worked with credit unions, but that also have experience in mergers and

acquisitions, is a must. The guide is a useful tool and the forms provided by NCUA are helpful. Nothing replaces the expertise

and insight of professional advisors who understand both the credit union industry and who also understand the complexities

associate with mergers and the post-merger consummation.

As noted above, due diligence is key. A comprehensive due diligence phase will include a look at every aspect of the other

potential merger candidate, from contracts to personnel, from management philosophy to dividend policies, from branch

locations to electronic member service lines. Each credit union will want to obtain as clear a picture as possible with respect

to the health, status and direction of its potential merger partner.

As one of the major due diligence items, the surviving credit union will want to complete a thorough analysis of the potential

merging credit union’s open-end lending portfolio. This would include all open-end loans, including without limitation credit

card portfolios, home equity line portfolios, and the status of the other credit union's open-end lending program, if any.

The credit union must be sure, prior to assuming them pursuant to the merger, that such open-end loans and lines of credit in

its merger partner’s portfolio are acceptable to the acquiring or surviving credit union. Once the merger plan is executed and

finalized, the surviving credit union inherits and assumes the assets and liabilities of the non-surviving credit union. Thus, it is

imperative to note the health, past performance, and future prospects for such open-end lending platforms.

To focus on the credit card portfolio, the surviving credit union needs to get itself comfortable with the existing credit card

portfolio. This includes the rates, the credit tiers used to establish risk-based rates, etc., with respect to the non-surviving

credit union’s portfolio that would be assumed pursuant to the merger. In merging with another credit union, should the

surviving credit union determine that it desires to increase the annual percentage rates on the credit cards assumed from the

non-surviving credit union pursuant to the merger, the change in annual percentage rate would be considered a significant

change in terms. The surviving credit union would be required to send a change in terms notice to each member affected by

the increase in APR. Regulation Z requires forty-five days’ advance notice to the member of an increase in the annual

percentage rate. In addition, the member would then have the option to reject the "significant change in terms" to their credit

card and opt instead of accepting the increase to reject the change, close their credit card account, and repay it on its then

current terms.

Clearly, the surviving credit union would face a difficult business decision if it were to assume an underperforming credit card

portfolio. One the one hand, the credit union can always decide to increase rates on its credit card products in accordance

with the procedures set forth in Regulation Z, but any such decision would have to be tempered by and weighed against the

potential loss of credit card business and volume due to member backlash and outcry against such increases in rates from

the "new" credit union.

Another important area for the due diligence inquiry will be third-party vendor contracts. All third-party vendor contracts will

need to be reviewed thoroughly to determine which vendors will be retained by the surviving credit union. In many instances,

where the two merging credit unions have contracts with two separate vendors for the same service (for example, a check

printing service), the surviving entity will need to make a determination as to which vendor to retain and which to part ways

with. Typically, the surviving credit union will want to maintain its current vendor relationship, but this is not always the case.

If, during the due diligence process, the surviving credit union determines that the non-surviving credit union has a better

third-party vendor arrangement, this may give the surviving credit union additional motivation to consummate the merger. The

focus would then turn to a review of the surviving credit union’s vendor contract to determine how it may be terminated. In

calculating the costs and expenses involved in the overall merger process, the due diligence review of vendor contracts will

be critical, as some contracts will require early termination fees, while others will contain provisions that set pricing terms on

the number of members of the credit union.

Similarly, the surviving credit union, prior to assuming and taking on a mortgage loan portfolio of its merger partner, must

perform a thorough analysis of the target credit union’s existing mortgage loan portfolio. If mortgage lending is something that

the surviving credit union is actively engaged in and relies on as a revenue-producing segment of the credit union, then the

surviving credit union needs to ensure that it will be assuming a healthy and profitable, well-performing mortgage portfolio.

Relevant to the inquiry is whether the target credit union originates, funds and services its own mortgage loans in its own

portfolio or whether the target credit union outsources these functions or sells its mortgage loans on the secondary market. If

a third party services the mortgage loans, does the target credit union have a right to buy back those servicing rights such

that the surviving credit union may be able to purchase the right to add such loans back into the credit union’s portfolio in

order to realize profits from the same? Regardless of the status of the mortgage lending portfolio, the surviving credit union

during the due diligence process needs to become familiar with the target credit union’s mortgage lending practices, and the

overall "fit" of the target credit union’s mortgage loan portfolio into the surviving credit union’s existing mortgage loan program

and portfolio. With the bevy of recent regulatory changes to the requirements for loan modifications, the costs, time and

resources involved in modifying mortgage loans has increased to heightened levels. For all intents and purposes, after a

merger the surviving credit union cannot, from a practical perspective, assume an underperforming mortgage loan portfolio

with the intent to go in and modify the terms of the existing mortgage loans to align with the surviving credit union’s mortgage

loans.

POST-MERGER CONSIDERATIONS

Often overlooked, but vitally important to a financial impact analysis of a potential merger, is the existence of such springing

clauses that would operate to increase the fees due to a third-party vendor based on membership size. Take a core

processor vendor contract that is priced based on membership size. The surviving credit union may be paying, by way of

example only, $2,000 a month for the third-party service, but that pricing may be based on a membership base of 25,000

members. Once that credit union merges with another credit union comprised of 20,000 members, the credit union could

conceivably see a marked increase in the fees charged by the third-party vendor based on the new membership total of

45,000 members. These types of inquiries are essential during the due diligence process and should be completed by, or at

minimum should involve, professional advisors with experience in these matters, who can identify the issues and provide

sound advice with respect to potential pitfalls in the merger process as it relates to integrating third-party vendor services for

the surviving, merged credit union.

As mentioned above, this article cannot possibly cover all aspects of pre- or post-mergers. For the reasons discussed above,

credit unions considering a merger should always consult qualified advisors and an attorney who can walk the credit union

through the process, including the regulatory framework and the logistics of a full-blown due diligence review of the potential

merger partner.

Back to top

E. Andrew Keeney, a partner with Kaufman & Canoles, is the editor of the Credit Union Legal Update. Andy has been

committed to the representation of credit unions for over three decades. In addition to serving as the in-house attorney for the

State Department Federal Credit Union and the Pentagon Federal Credit Union, he has represented many credit unions,

leagues and associations, as well as the NCUA. Andy would like to acknowledge Aaron J. Ambrose, an associate with

Kaufman & Canoles, for his contributions to this publication.

E. Andrew Keeney

Partner

T (757) 624.3153

F (757) 624.3169

[email protected]

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion

on specific facts and circumstances. To be removed from this mailing list, please click here. Copyright © 2012. Kaufman & Canoles.

kaufCAN.com CREDIT UNION LEGAL UPDATE spring 2012

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Risks and Liabilities ofRisks and Liabilities of

Loan ParticipationsLoan Participations

Police OfficerPolice Officer’’s Credit Union s Credit Union

ConferenceConference

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E. Andrew Keeney, Esq.

Kaufman & Canoles, P.C.

150 West Main Street, Suite 2100

Norfolk, VA 23510

(757) 624-3153

[email protected]

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Topics for ConsiderationTopics for Consideration

• Definitions and Requirements of Loan Participations

• Due Diligence Items and Checklists

• Contract Issues and Checklists

• Tips to Avoid Risks, Abuses and Potential Liabilities of Loan Participations

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Participated loan relationships are co-lendingarrangements in which the originating lender sells an interest in the loan to the participant.

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GROWTH!!!GROWTH!!!

• As of June 2011

– 1,432 FICU’s reported loan participation loans with total balances of $12.8 billion

– Since 2007 31% increase – up from $9.7 billion

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What is a What is a

Loan Participation?Loan Participation?

• Defined by federal regulation as a “loan where one or more eligible organizations participates pursuant to a written agreement with the originating lender.”

• Essentially a loan made by one or more credit unions to a single borrower and is typically accomplished by an originating credit union selling a portion of a loan to a second credit union.

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General Risks and BenefitsGeneral Risks and Benefits

• Degree of risk varies based on whether credit union is seller or buyer

• Sale is with recourse or non-recourse

• The size and complexity of individual loans

• Level of experience and expertise on both sides

• External economic factors

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Benefits of Loan ParticipationsBenefits of Loan Participations

to Sellerto Seller

• Increase liquidity

• Increase ability to serve members since participating lenders can extend loans for higher amounts

• Mechanism to manage interest rates

• Manage credit and geographic concentration risks

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Benefits of Loan ParticipationsBenefits of Loan Participations

to the Buying Credit Unionto the Buying Credit Union

• Diversified balance sheet

• Use of excess liquidity

• Increasing revenue

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Risks of Loan ParticipationsRisks of Loan Participations

to Selling Credit Unionto Selling Credit Union

• Regulatory compliance

• Full disclosure

• Credit administration

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Risks of Loan ParticipationsRisks of Loan Participations

to Buying Credit Unionto Buying Credit Union

• Risk assessment

• Strategic planning

• Due diligence

• Contracts and legal review

• Underwriting credit risks

• Internal controls

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NCUA Rules and RegulationsNCUA Rules and Regulations

12 CFR 12 CFR §§ 701.22701.22• Organizations eligible to participate in loan

participations are:– federal or state-chartered credit unions– CUSOs– any federally-chartered or federally-insured financial

institution

• Amount regulated by NCUA:– no amount specifically identified for a federal credit union– no federal credit union shall obtain an interest participation

loan if some of that interest and other indebtedness exceeds 10% of the federal credit union’s unimpaired capital or surplus

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Other NCUA LimitationsOther NCUA Limitations

A federal credit union originating lender must:

• originate loans only to its members

• retain an interest of at least 10% on the face amount of each loan (no reference to recourse or non-recourse)

• retain the original or copies of the loan documents

• require the credit committee or loan officer to use the same underwriting standards for participation loans as other loans underwritten and approved at the credit union

A written master participation agreement

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Other LimitationsOther Limitations

A participating federal credit union that is not

an originating lender shall:

• participate only in loans it is empowered to grant

• adopt a board-authorized participation policy setting forth loan underwriting standards prior to entering into a participation

• participate in participation loans only if made to its own members or members of another participating credit union

• retain original copies of participation agreement and a scheduleof all covered loans; and

• obtain approval of Board of Directors or ALCO

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Other Limitations (cont.)Other Limitations (cont.)

A risk assessment and due diligence shall be performed prior to entering into any third-party arrangement.

This is a mandatory requirement regardless of whether or not the other party is a credit union or a CUSO.

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Related ProvisionsRelated Provisions

• Prepayment penalties for a federal credit union cannot be collected (12 USC §1757(5)(A)(viii))

• Buying credit unions may only participate in loans in which the original lender remains a participant (Office of General Counsel Opinion 07-1035)

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NCUA ExaminersNCUA Examiners’’ WarningsWarnings(from NCUA Examiners Guide,(from NCUA Examiners Guide,

Chapter 10, Part 2)Chapter 10, Part 2)

Examples of Unsafe and Unsound Operating

Policies and Procedures in Loan Participations:

• Purchase of loans without investigation of borrowers’ credit positions, the condition of the security or the property and theadequacy of appraisal reports

• Purchase of unacceptably high-risk loans to obtain purchase discounts or net yields above current market averages

• Sales of high-yield loans and replacement of these loans with lower-yield loans

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NCUA ExaminersNCUA Examiners’’ Warnings Warnings

(cont.)(cont.)

• Sales of loans at a time when no current or projected demand for loanable funds exists

• Participation sales only for creating income from a yield differential of particularly risky practice under the conditions described immediately above

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Due Diligence Items/ChecklistsDue Diligence Items/Checklists

• Inspection of property/In person

• Review and analysis of appraisal

• Environmental assessment

• Likelihood of resale

• Guarantors

• Loan servicer

• NCUA regulations & guidelines– Section 701.22

– NCUA Letter No. 08-CU-26

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Contract Issues/ChecklistsContract Issues/Checklists

• Loan servicer rights

• Representations & warranties

– Underwriting policies

– Collection procedures

– Review of loan documentation

• Notice provisions

• Attorney review of contract

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War Stories & ExamplesWar Stories & Examples

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Other GuidanceOther Guidance

• Supervisory NCUA Letter 08-CU026 – Evaluating Loan Participation Programs

• NCUA Examiner’s Guide – Chapter 10, Pages 10A-34 (participation loan & impermissible policies & practices)

• NCUA Letter to Credit Unions 07-CU-13 – Evaluating Third Party Relationships

• NCUA AIRES Questionnaire – Loan Participations

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Please return for the next Please return for the next

session:session:

Roadblocks to Avoid Risks, Roadblocks to Avoid Risks,

Abuses & Potential Liabilities of Abuses & Potential Liabilities of


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Norfolk, VA 23510

(757) 624-3153

[email protected]

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Norfolk, VA 23510

(757) 624-3153

[email protected]

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Topics for ConsiderationTopics for Consideration

• Tips to Avoid Risk, Abuses & Potential Liabilities of Loan Participations

• Some Contract Tips

• Proposed Regulatory Changes

• Crystal Ball Predictions on New Regulatory Requirements

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Tips to Avoid Risks, Abuses & Tips to Avoid Risks, Abuses &

Potential Liabilities of Loan Potential Liabilities of Loan

ParticipationsParticipations

• Originating lender must manage the loan relationship with same standard of care as it would with any other loan it originates & services

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Participations (cont.)Participations (cont.)• Participating credit union should

– Perform independent underwriting & risk analysis as though originating & servicing the loan themselves

– Evaluate the financial condition of the borrower

– Due diligence to see if the originating credit union has the expertise & systems in place

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Participations (cont.)Participations (cont.)

• Financial analysis of the credit unions involved in the transaction

• With multiple lenders – well-written master participation loan agreement– Identification of the roles & responsibilities of all

parties involved

– Verification that all parties have performed independent financial analysis

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Participations (cont.)Participations (cont.)• Requirement that each loan participant has

reviewed the loan documents prior to closing

• Identification of loans sold with & without recourse

• Identification & due diligence regarding any guarantors

• Servicing issues

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Participations (cont.)Participations (cont.)

• Loan modification issues – DECISIONS

– Change in terms requiring what % of consent of the loan participants – majority rules unanimous consent

• Buy-back rights

• Attorney review of contract

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Some Contract TipsSome Contract Tips

• Form agreements since 2003

• Pre-printed form contracts

• Guarantor(s) information to be included in definition of Loan Documents

• Servicer– Defined/described

– (Due diligence)

– Any right to make loan modifications

– Fees & delinquencies

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Some Contract Tips (cont.)Some Contract Tips (cont.)

• Privacy & Confidentiality

• Broker’s rights/responsibilities/payments

• Right to buy back

– For cause

– For convenience

• Representations & warranties

• Notification

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Some Contract Tips (cont.)Some Contract Tips (cont.)

• Voting rights

• Custody of loan documents

• Separate trust accounts for funds

• Statutory liens

• Prepayment penalty

• Defaults

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Proposed Regulatory ChangesProposed Regulatory Changes

• Minimum standards

• Underwriting standards must be “same” as underwriting standards buying credit union utilizes

• Limit aggregate amount of loan participations purchased from any 1 originating credit union– not to exceed 25% of credit union’s net worth

– NCUA feedback

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Proposed Regulatory Changes Proposed Regulatory Changes

(cont.)(cont.)• Establish limits on amount of loan

participation

– by each loan type

– not to exceed a specified percentage of credit union’s net worth

• Establish a limit on the aggregate amount of loan participations to be purchased

– not to exceed 15% of credit union’s net worth

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Proposed Regulatory Changes Proposed Regulatory Changes

(cont.)(cont.)

• Loan participation minimum standards

• Expansion to federally-insured state-chartered credit unions

– Delinquency as of end of 2010

• 4.11% FISCU

• 3.74% FCU

– Legal authority for expansion?

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Crystal Ball Projections Crystal Ball Projections

Regarding New RegulationsRegarding New Regulations

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A ceiling of 25% of the purchasing credit union’s net worth on loan participations from one originator.

No waivers

NCUA’s preliminary response

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A limit of 15% of the purchasing credit union’s net worth on loan participations from one borrower

CRYSTAL BALL

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A requirement that federally-insured credit unions that are selling loan participations must retain a 10% interest in the loan originated (FCUs already must meet this requirement)

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A requirement that loan participations would have to conform to the same underwriting standards that a federal credit union employs when originating a loan

CRYSTAL BALL

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A requirement that loan participations be purchased from an eligible organization

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Norfolk, VA 23510

(757) 624-3153

[email protected]

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loan participations - andy keeney

Economy & Finance

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