Salient Features of India constitution especially power and functions
Risks and Liabilities of Loan Participations
1. Risks and Liabilities of
Loan Participations
Police Officer’s Credit Union
Conference
kau fC AN .com
2. E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3153
eakeeney@kaufcan.com
kau fC AN .com
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
kau fC AN .com
4. Participated loan relationships are co-lending
arrangements in which the originating lender
sells an interest in the loan to the participant.
kau fC AN .com
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
kau fC AN .com
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.
kau fC AN .com
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
kau fC AN .com
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
kau fC AN .com
11. Benefits of Loan Participations
to the Buying Credit Union
• Diversified balance sheet
• Use of excess liquidity
• Increasing revenue
kau fC AN .com
12. Risks of Loan Participations
to Selling Credit Union
• Regulatory compliance
• Full disclosure
• Credit administration
kau fC AN .com
13. Risks of Loan Participations
to Buying Credit Union
• Risk assessment
• Strategic planning
• Due diligence
• Contracts and legal review
• Underwriting credit risks
• Internal controls
kau fC AN .com
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
kau fC AN .com
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
kau fC AN .com
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
kau fC AN .com
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.
kau fC AN .com
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)
kau fC AN .com
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
kau fC AN .com
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
kau fC AN .com
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
kau fC AN .com
22. Contract Issues/Checklists
• Loan servicer rights
• Representations & warranties
– Underwriting policies
– Collection procedures
– Review of loan documentation
• Notice provisions
• Attorney review of contract
kau fC AN .com
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
kau fC AN .com
25. Please return for the next
session:
Roadblocks to Avoid Risks,
Abuses & Potential Liabilities of
Loan Participations
kau fC AN .com
26. E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3153
eakeeney@kaufcan.com
kau fC AN .com
27. Risks and Liabilities of
Loan Participations
Police Officer’s Credit Union
Conference
kau fC AN .com