The NCUA published its final rule regarding loan participations on June 20. The rule was published in the Federal Register on June 25 and will become effective on July 25. The final rule applies to both federal credit unions and federally insured credit unions that purchase loan participations.
The final rule requires FICUs to adopt a written loan participation policy with certain provisions. The policy must address various concentration limits, including the maximum limit a FICU intends to place on its outstanding participations and parameters for review, including a periodic review for appropriateness and adherence to those parameters. The FICU must also establish underwriting standards for loan participations. Lastly, the policy should be created in accordance with the size, complexity and lending experience of the credit union.
The final rule also contains concentration limits which include a single originator cap not to exceed the greater of $5 million or 100% of net worth (with the ability to apply for a waiver). Additionally, there is a limitation of 15% of net worth on the purchase of participations of loans made to any one borrower or group of borrowers. Both of these provisions allow FICUs to apply for waivers from these limits and the final rule provides guidance on what those waivers should include.
Also, the final rule includes various requirements for the loan participation agreement. For example, for FICUs, the loan participation agreement must include a provision requiring an originating lender to retain 5% of the outstanding balance through the life of the loan, unless applicable state law establishes a higher retention. FCUs, consistent with the FCU Act, must require the originating FCU to retain at least 10% of the loan. FCUs may purchase loan participations from non-FCU originating lenders that retain at least 5% for the loans duration. Other provisions require the agreement to identify each participated loan, enumerate servicing responsibilities for the loan and include disclosure requirements regarding the ongoing financial condition of the loan, the borrower and the servicer.
Credit unions that currently have loan participations that exceed the limits in the final rule will be grandfathered until the excess has been paid off or sold in the normal course of business. The NCUA has created a chart comparing the key provisions of the proposed rule versus the final rule, which can be found here.