Part I of a presentation by Andy Keeney of Kaufman & Canoles to the Police Officer's Credit Union Conference, June 2012.

1. Risks and Liabilities of
Loan Participations
Police Officer’s Credit Union
Conference
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2. E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3153
eakeeney@kaufcan.com
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3. Topics 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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4. Participated loan relationships are co-lending
arrangements in which the originating lender
sells an interest in the loan to the participant.
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5. 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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8. What is a
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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9. General 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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10. Benefits of Loan Participations
to 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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11. Benefits of Loan Participations
to the Buying Credit Union
• Diversified balance sheet
• Use of excess liquidity
• Increasing revenue
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12. Risks of Loan Participations
to Selling Credit Union
• Regulatory compliance
• Full disclosure
• Credit administration
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13. Risks of Loan Participations
to Buying Credit Union
• Risk assessment
• Strategic planning
• Due diligence
• Contracts and legal review
• Underwriting credit risks
• Internal controls
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14. NCUA Rules and Regulations
12 CFR § 701.22
• 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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15. Other 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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16. Other 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 schedule
of all covered loans; and
• obtain approval of Board of Directors or ALCO
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17. 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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18. Related 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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19. NCUA Examiners’ Warnings
(from NCUA Examiners Guide,
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 the
adequacy 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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20. NCUA Examiners’ Warnings
(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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21. Due 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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22. Contract 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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23. War Stories & Examples
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24. Other 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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25. Please return for the next
session:
Roadblocks to Avoid Risks,
Abuses & Potential Liabilities of
Loan Participations
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26. E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3153
eakeeney@kaufcan.com
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27. Risks and Liabilities of
Loan Participations
Police Officer’s Credit Union
Conference
kau fC AN .com