Loan Participations; Purchase, Sale and Pledge of Eligible Obligations; Purchase of Assets and Assumption of Liabilities, 37946-37958 [2013-15178]
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Federal Register / Vol. 78, No. 122 / Tuesday, June 25, 2013 / Rules and Regulations
TABLE 2—COLLATERAL HAIRCUTS
SOVEREIGN ENTITIES
Haircut without currency mismatch 1
Residual maturity
OECD Country Risk Classification 2 0–1 ....................................
OECD Country Risk Classification 2–3 ......................................
< = 1 year ................................
>1 year, <= 5 years .................
>5 years ..................................
<= 1 year .................................
>1 year, <= 5 years .................
> 5 years .................................
0.005.
0.02.
0.04.
0.01.
0.03.
0.06.
CORPORATE AND MUNICIPAL BONDS THAT ARE BANK-ELIGIBLE INVESTMENTS
Residual maturity for debt
securities
All ................................................................................................
All ................................................................................................
All ................................................................................................
<=1 year ..................................
>1 year, <=5 years ..................
>5 years ..................................
Haircut without currency mismatch
0.02.
0.06.
0.12.
OTHER ELIGIBLE COLLATERAL
Main index 3 equities (including convertible bonds) .........................................................................
Other publicly-traded equities (including convertible bonds) ...........................................................
Mutual funds .....................................................................................................................................
Cash collateral held ..........................................................................................................................
0.15.
0.25.
Highest haircut applicable to any security in
which the fund can invest.
0.
1 In cases where the currency denomination of the collateral differs from the currency denomination of the credit transaction, an additional 8
percent haircut will apply.
2 OECD Country Risk Classification means the country risk classification as defined in Article 25 of the OECD’s February 2011 Arrangement
on Officially Supported Export Credits Arrangement.
3 Main index means the Standard & Poor’s 500 Index, the FTSE All-World Index, and any other index for which the covered company can
demonstrate to the satisfaction of the Federal Reserve that the equities represented in the index have comparable liquidity, depth of market, and
size of bid-ask spreads as equities in the Standard & Poor’s 500 Index and FTSE All-World Index.
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(iii) Basel Collateral Haircut Method.
A national bank or savings association
may calculate the credit exposure of a
securities financing transaction
pursuant to 12 CFR Part 3, Appendix C,
Sections 32(b)(2)(i) and (ii); 12 CFR Part
167, Appendix C, Sections 32(b)(2)(i)
and (ii); or 12 CFR Part 390, subpart Z,
Appendix A, Sections 32(b)(2)(i) and
(ii), as appropriate.
(2) Mandatory or alternative method.
The appropriate Federal banking agency
may in its discretion require or permit
a national bank or savings association to
use a specific method or methods set
forth in paragraph (c)(1) of this section
to calculate the credit exposure arising
from all securities financing
transactions or any specific, or category
of, securities financing transactions if
the appropriate Federal banking agency
finds, in its discretion, that such method
is consistent with the safety and
soundness of the bank or savings
association.
PART 159—SUBORDINATE
ORGANIZATIONS
6. The authority citation for part 159
continues to read as follows:
Authority: 12 U.S.C. 1462, 1462a, 1463,
1464, 1828, 5412(b)(2)(B).
16:29 Jun 24, 2013
§ 159.3 What are the characteristics of,
and what requirements apply to,
subordinate organizations of Federal
savings associations?
*
*
*
*
*
(k) * * *
(2) The LTOB regulation does not
apply to loans from you to your GAAPconsolidated service corporation or from
your GAAP-consolidated service
corporation to you. However, part 32
imposes restrictions on the amount of
loans you may make to nonconsolidated service corporations.
Loans made by a GAAP-consolidated
service corporation are aggregated with
your loans for LTOB purposes.
*
*
*
*
*
■ 8. Section 159.5 is amended by
revising paragraphs (b) and (c) to read
as follows:
§ 159.5 How much may a Federal savings
association invest in service corporations
or lower-tier entities?
*
■
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7. Section 159.3 is amended by
revising paragraph (k)(2) to read as
follows:
■
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*
*
*
*
(b) In addition to the amounts you
may invest under paragraph (a) of this
section, and to the extent that you have
authority under other provisions of
section 5(c) of the HOLA and part 160
PO 00000
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of this chapter, and available capacity
within any applicable investment limits,
you may make loans to any nonconsolidated subsidiary, subject to the
lending limits in part 32 of this chapter.
(c) For purposes of this section, the
term ‘‘obligations’’ includes all loans
and other debt instruments (except
accounts payable incurred in the
ordinary course of business and paid
within 60 days) and all guarantees or
take-out commitments of such loans or
debt instruments.
Dated: June 19, 2013.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2013–15174 Filed 6–24–13; 8:45 am]
BILLING CODE 4810–33–P
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Parts 701 and 741
RIN 3133–AEOO
Loan Participations; Purchase, Sale
and Pledge of Eligible Obligations;
Purchase of Assets and Assumption of
Liabilities
National Credit Union
Administration (NCUA).
AGENCY:
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ACTION:
Final rule.
NCUA amends its loan
participation rule, eligible obligations
rule, and requirements for insurance
rule to clarify how the loan
participation rule is to be applied and
how it relates to other rules. The
amendments reorganize the loan
participation rule and focus on the
purchase side of loan participation
transactions. The amendments make it
easier to understand NCUA’s regulatory
requirements for loan participations.
The amendments also expand loan
participation requirements to federally
insured, state-chartered credit unions
(FISCUs).
SUMMARY:
DATES:
This rule is effective July 25,
2013.
FOR FURTHER INFORMATION CONTACT:
Pamela Yu, Staff Attorney, Office of
General Counsel at (703) 518–6540; or
Matthew J. Biliouris, Director of
Supervision, Office of Examination and
Insurance at (703) 518–6360.
SUPPLEMENTARY INFORMATION
I. Background
II. Summary of Public Comments
III. Section-by-Section Analysis of the Final
Rule
IV. Regulatory Procedures
I. Background
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A. Why is NCUA adopting this rule?
Loan participations strengthen the
credit union industry by providing a
useful way for credit unions to diversify
their loan portfolios, improve earnings,
generate loan growth, manage their
balance sheets, and comply with
regulatory requirements. Credit unions
also use liquidity obtained through the
sale of loan participations to increase
the availability of credit to small
businesses and consumers.
Nevertheless, the NCUA Board
(Board) believes that loan participations
also pose an inherent risk to the
National Credit Union Share Insurance
Fund (NCUSIF) due to the
interconnectedness between
participants. For example, large
volumes of participated loans may be
tied to a single originator, borrower, or
industry or they may be serviced by a
single entity. If any one of those entities
experiences a financial or other
problem, the effects of such
concentration could impact multiple
credit unions. Additionally, because
both federal credit unions (FCUs) and
federally insured, state-chartered credit
unions (FISCUs) actively engage in loan
participations, there is potential risk to
the NCUSIF. Accordingly, it is
important to the safety and soundness of
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the NCUSIF that all federally insured
credit unions (FICUs) adhere to
appropriate standards when transacting
loan participations.
Finally, it has come to NCUA’s
attention during examinations and other
supervisory contacts with FICUs that
many credit union officials find the loan
participation rule unclear as to whom it
applies, and what transactions it covers.
This rule is intended to address this
concern. For these reasons, the Board is
issuing this final rule to amend
§§ 701.22, 701.23, and 741.8.
B. What changes were included in the
proposed rule?
In December 2011, the Board issued a
proposed rule to amend the loan
participation rule.1 The proposal
reorganized the rule to make it easier to
read and understand. It also changed the
rule’s focus to address the requirements
for a credit union purchasing a loan
participation. In addition, to ensure that
loan participation transactions are
conducted in a safe and sound manner,
the proposed rule prescribed certain
concentration limits on credit unions
and encouraged credit unions to
establish others of their own. It also
required that a loan participation
agreement include specific provisions to
assist a purchasing credit union in
conducting its due diligence. The Board
proposed these changes to better detail
NCUA’s regulatory expectations
regarding key aspects of a loan
participation purchase, including: (1)
The credit union’s loan participation
policy; (2) the loan participation
agreement; and (3) ongoing monitoring
of the loan participation.
II. Summary of Public Comments
The public comment period for the
proposed rule ended on February 21,
2012. NCUA received 215 comments on
the proposed rule: 48 from FCUs; 53
from state-chartered credit unions; 5
from trade associations (1 representing
community development credit unions;
2 representing credit unions; 1
representing state credit union
supervisors; and 1 representing credit
union service organizations (CUSOs));
23 from state credit union leagues; 11
from CUSOs or third party vendors; 73
from individuals or credit union
volunteers (including 67 identical
letters); and 1 from a law firm.
A majority of the comments on the
proposal expressed opposition to, or
raised concerns about, one or more
aspects of the proposal. A number of
commenters, however, supported at
least one specific aspect of the proposal
1 76
PO 00000
FR 79548 (Dec. 22, 2011).
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or expressed general support for its
overall intent and key principles.
A. What were the general comments
supporting the proposed rule?
A significant number of commenters
supported applying the loan
participation rule’s provisions to
FISCUs. These commenters maintained
that the data quoted in the proposed
rule’s preamble demonstrates that
applying the rule to FISCUs is
appropriate. Some commenters also
suggested that subjecting FCUs and
FISCUs to the same requirements would
promote the loan participation market
and increase participation activity.
Commenters expressed general
support for the loan originator retention
requirement of 10 percent of the loan
amount as required by the Federal
Credit Union Act (FCU Act) for FCUs,
and the single borrower concentration
limit of 15 percent of a credit union’s
net worth.
Additionally, some commenters
supported the proposed provision
requiring a credit union to use
underwriting standards for purchasing
loan participations similar to those the
credit union uses when it originates a
loan. As discussed below, however, the
majority of commenters opposed this
provision.
B. What were the general comments
opposing the proposed rule?
There were two proposed provisions
that generated the greatest degree of
concern for the majority of commenters.
They were: (1) The single originator
concentration limit of 25 percent of net
worth; and (2) the requirement that a
FICU establish underwriting standards
for loan participations which, at a
minimum, meet the same underwriting
standards the FICU uses when it
originates its own loan.
More generally, commenters
suggested that the proposal would
significantly limit a FICU’s ability to sell
and purchase loan participations, while
providing only limited safety and
soundness benefits. They argued that
the rule should allow greater flexibility,
particularly because of the importance
of loan participations in helping credit
unions to diversify their portfolios,
improve earnings, manage and generate
liquidity, manage asset growth,
maintain an adequate capital ratio,
diversify lending risk, and address loan
concentration issues.
Commenters also expressed concern
that the rule would impose undue
regulatory burdens on credit unions,
with a disproportionately adverse
impact on smaller credit unions. They
asserted that the proposal was
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misguided in prescribing a one-size-fitsall approach, without considering the
asset size, level of experience, or risk
profile of each individual credit union.
Instead, commenters suggested that the
rule should focus on identified problem
areas or on participations where the risk
profile for the underlying loans is
higher, such as participations in
member business loans (MBLs) and
commercial real estate loans.
In addition, commenters maintained
that loan participations do not represent
a systemic risk to the NCUSIF and
suggested the proposal may actually
increase the overall risk to the NCUSIF.
Commenters argued that limiting the
ability of credit unions to mitigate risk
through diversification could increase,
rather than reduce, risk exposures.
Several commenters also expressed
concern that the proposal would
undermine the dual chartering system.
These commenters suggested that state
law and regulation should continue to
govern loan participations for FISCUs.
NCUA has carefully reviewed and
considered all the comments it received
in response to the proposal.
Acknowledging the substantial concerns
raised by commenters, the Board has
made adjustments to the final rule. Most
notably, the final rule establishes a
higher, more flexible single originator
concentration limit. It also permits a
FICU to purchase a participation in a
loan even if it does not originate that
kind of loan. A section-by-section
analysis of the final rule and a
discussion of the pertinent public
comments follows.
III. Section-by-Section Analysis of the
Final Rule
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A. § 701.22—Introductory Text
The introductory text clarifies the
scope of the rule and helps distinguish
a loan participation under § 701.22 from
an eligible obligation under § 701.23.
Further, it clarifies that the rule applies
to a natural person FICU’s purchase of
a loan participation where the borrower
is not a member of that credit union.
Generally, an FCU’s purchase, in whole
or in part, of its member’s loan is
covered by NCUA’s eligible obligations
rule at § 701.23.2 Additionally, by a
cross-reference to Part 741 of NCUA’s
regulations, the rule also is made
applicable to natural person FISCUs.
The Board notes that corporate credit
unions are subject to the loan
participation requirements set forth in
2 Note, however, a limited exception for certain
well capitalized federal credit unions to purchase,
subject to certain conditions, non-member eligible
obligations from a FICU. 12 CFR 701.23(b)(2).
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Part 704 and, therefore, are not subject
to § 701.22 of NCUA’s regulations.
Some commenters expressed
continued confusion regarding the
scope of § 701.22 and § 701.23 of
NCUA’s regulations. The final rule
clarifies the interplay between § 701.22
and § 701.23, but the Board
acknowledges these regulations are
complex so additional modifications
have been made to further clarify the
introductory text to the final rule.
B. § 701.22(a)—Definitions
The final rule revises the definitions
for ‘‘originating lender’’ and
‘‘participation loan’’ to clarify that the
originating lender must participate in
the loan throughout the life of the loan.
It also adds a new definition of
‘‘associated borrower.’’ The definitions
of ‘‘credit union,’’ ‘‘credit union
organization,’’ ‘‘eligible organization,’’
and ‘‘financial organization’’ were not
part of the proposed amendments and
are generally unmodified from the
existing rule. For consistency with the
formatting conventions recommended
by the Federal Register, however, the
final rule amends the paragraph’s format
by listing all definitions alphabetically
and removing the numeric designations.
A brief discussion of each definition,
and the public comments pertinent to
each, follows.
1. Associated Borrower
The proposed rule added a new
definition of the term ‘‘associated
borrower.’’ Some commenters stated
that the proposed definition is too
broad. They also expressed concerns
that the definition is inconsistent with
the MBL rule’s definition of ‘‘associated
member.’’ 3 The Board notes the
‘‘associated borrower’’ definition is
more specific than, but not an
expansion of, the definition of
‘‘associated member’’ under Part 723.
The definition tracks closely with the
MBL rule, but it more clearly defines the
types of relationships considered to be
an associated relationship by providing
examples of the types of parties who
qualify as an associated borrower. Each
of the defined relationships under
§ 701.22(a) is also captured under the
broader language in § 723.21. In
addition, use of the word ‘‘borrower’’
instead of ‘‘member’’ is intentional, as
not all participation loans would be
made to a member of the purchasing
credit union. As such, the Board
believes the definition of ‘‘associated
borrower’’ is appropriate.
3 12
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CFR 723.21.
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2. Credit Union Organization
The loan participation rule defines
‘‘credit union organization’’ as ‘‘any
credit union service organization
meeting the requirements of part 712 of
this chapter,’’ but excludes ‘‘trade
associations or membership
organizations principally composed of
credit unions.’’
While this definition was not
included in any proposed amendments,
several commenters suggested the
definition of ‘‘credit union
organization’’ could be interpreted to
exclude FISCUs’ CUSOs because
NCUA’s CUSO rule (Part 712) does not
apply in full to CUSOs formed by statechartered credit unions. The Board
clarifies that the definition includes
CUSOs subject to any requirement
under Part 712, including CUSOs
invested in or loaned to by FISCUs.
3. Eligible Organization
Under the current rule, the term
‘‘eligible organization’’ means ‘‘a credit
union, credit union organization, or
financial organization.’’ The definition
of ‘‘eligible organization’’ was not part
of the proposed amendments, but
several commenters contended that the
current definition of ‘‘eligible
organization’’ is too limited. They
argued that the definition should be
expanded to include additional types of
organizations to allow investors outside
the credit union industry to participate
in loans. The Board believes the current
definition is sufficiently broad because,
through the term ‘‘financial
organization,’’ it includes any federally
chartered or federally insured financial
institution and a host of state and
federal government sponsored and
originated programs.
In a 2003 rulemaking 4 that expanded
the definition of ‘‘financial
organization’’ to include state and
federal government agencies, the Board
noted that the rule derives its definition
from the legislative history of the 1977
public law that granted FCUs various
authorities, including the authority to
engage in loan participations.5 In
granting this authority, Congress
expressed its intent to enhance the
ability of FCUs to serve their members’
loan demands. Congress also expressed,
however, that originating FCUs must
maintain discipline in the origination
process. In accordance with the FCU
Act and the legislative history, the
Board believes the loan participation
authority must not be so broad that loan
4 68 FR 39866, 39867 (July 3, 2003); see also 68
FR 75110 (Dec. 30, 2003).
5 H.R. Rep. No. 95–23, at 12 (1977), reprinted in
1977 U.S.C.C.A.N. 115.
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participations may be originated from
any source. As such, the Board believes
the current definition of eligible
organization already includes all
appropriate entities. Further, as
discussed below, at a minimum, the
seller in a loan participation agreement
must be an eligible organization. The
purchasing participants, however, may,
but are not required to, be eligible
organizations.
4. Financial Organization
While the definition of ‘‘financial
organization’’ was not part of the
proposed amendments, several
commenters contended the definition
should be revised to include nonfederally insured or non-federally
chartered financial institutions, such as
privately insured, state-chartered credit
unions (PISCUs). The Board notes the
rule’s current definition of ‘‘eligible
organization’’ already includes nonfederally insured or non-federally
chartered credit unions. Through the
term ‘‘credit union,’’ an eligible
organization includes any federal or
state chartered credit union, including
those that are privately insured.
5. Loan Participation
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The proposed rule revised the
definition of ‘‘loan participation’’ to
clarify that the originating lender must
participate in the loan throughout the
life of the loan.
During the public comment period for
the proposal, a question was raised with
respect to the stipulation in the
definition that ‘‘one or more eligible
organizations participate’’ in the loan.
This commenter suggested that this
language is ambiguous with respect to
whether one or all participants must be
an eligible organization. As noted above,
at a minimum, the originating lender in
a loan participation agreement must be
an eligible organization. Purchasing
participants are not required to be
eligible organizations.
In addition, commenters raised
concerns that the proposed definition’s
requirement for ‘‘the originating lender’s
continuing participation throughout the
life of the loan’’ would prohibit a FICU
from purchasing a loan participation
and then selling participation interests
in its participated portion of that loan.
These comments are addressed in the
next section.
6. Originating Lender
The proposed rule amended the
definition of ‘‘originating lender’’ to
clarify the requirement that a FICU may
purchase a participation in a loan only
from the participant with which the
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borrower initially or originally contracts
for a loan.
Some commenters suggested the term
‘‘originating lender’’ should be changed
to ‘‘lead lender’’ and the definition
revised to allow the purchases of loan
participation interests from a lender that
did not initially originate the loan. In
addition, several commenters expressed
concern that the proposed definition of
‘‘originating lender,’’ read together with
the proposed ‘‘loan participation’’
definition, would prohibit the resale of
participation interests. These
commenters suggested that the rule
should permit the resale of participation
interests and/or that a credit union
should be permitted to buy an eligible
obligation or whole loan from a CUSO
or another credit union and then sell
participations in that loan.
The Board notes that the current rule
allows for the purchase of a loan
participation interest only from the
lender that initially originated the loan.
A participation agreement must be made
‘‘with the originating lender,’’ that is,
the ‘‘participant with which the member
contracts.’’ 6 In other words, under the
current rule, only the lender that
initially originates a loan may sell
participations in that loan to other
lenders. The current rule does not
permit the resale of a participation
interest or the purchase of a
participation interest in an eligible
obligation. The proposed amendments
were intended to retain and clarify this
existing requirement. In a resale, a
credit union cannot participate its
interest in a loan because it is not the
originating lender. Similarly, a credit
union that purchases a loan as an
eligible obligation from a CUSO or
another credit union cannot participate
that loan to others because the credit
union is not the originating lender. The
requirement that credit unions only
participate with the originating lender
derives from the FCU Act’s requirement
for originating FCUs to retain at least a
10 percent interest in the face amount
of all loans they participate out.7
Moreover, the Board interprets the
authority in the FCU Act for credit
unions to participate in loans ‘‘with’’
other lenders to contemplate a shared,
continuing lending arrangement.8
Simply put, the rule requires an
originating lender to remain part of the
participation arrangement and to retain
a continuing interest in the loan in order
to be a true participant. Otherwise, the
transaction is not a loan participation
but more akin to the sale of an eligible
6 12
CFR 701.22(a).
U.S.C. 1757(5)(E).
8 12 U.S.C. 1757(5).
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37949
obligation. As the Board noted in 1991,
permitting the sale of participation
interests in eligible obligations ‘‘will
blur the distinction between loan
participations and loan purchases and
sales,’’ arguably circumventing the
purpose of the loan participation and
eligible obligations rules.9 Additionally,
the Board believes the continued
participation of the lender that initially
originated the loan is integral to a safe
and sound participation arrangement. In
1991, the Board expressed its concern
that a lender ‘‘may have a decreased
interest in properly underwriting a loan
if they know they can later reduce their
risk by selling participation interests in
it.’’ 10 The requirement for the
originating lender’s continued
participation in a loan participation
arrangement is intended to address this
safety and soundness concern.
Accordingly, the definition of
‘‘originating lender’’ is adopted
substantively as proposed in the final
rule.
The Board, however, notes FICUs
experiencing liquidity needs have
several options for liquidating their
participation interests in a manner
consistent with the final rule. For
example, an FICU may sell its
participation interest back to the
originating lender or it may sell its
interest to another lender within the
same participation arrangement. Subject
to the requirements in § 701.23, a FICU
may also sell its interest as an eligible
obligation. A FICU may also enter into
an assumption agreement whereby
another lender would agree to assume,
in whole, the FICU’s participation
interest in a loan.11
Additionally, several commenters
suggested the word ‘‘member’’ in the
definition of originating lender be
replaced with ‘‘borrower’’ for
consistency with the introductory
language to § 701.22. The Board agrees,
and the final definition has been
modified accordingly.
Commenters also expressed concern
about the definition of ‘‘originating
lender’’ and its application to CUSOs.
These commenters observed that a
CUSO often serves as an originator in
name only and, thus, is not the most
appropriate party to regard as the
originating lender for the purposes of
the rule. For example, loans may be
underwritten and processed by a CUSO,
9 56
FR 15036 (Apr. 15, 1991).
10 Id.
11 An assumption, in whole, of a participation
interest is distinguishable from the resale of a
participation interest (i.e., a participation of a
participated interest) because another lender would
fully assume the obligation of a participant in a
participation agreement with the originating lender.
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but funded by its owner credit union.
The Board acknowledges that this CUSO
model is not uncommon within the
industry and permissible under § 712.5.
For purposes of this final rule, it is the
Board’s intent that the originating
lender is the entity with which the
borrower initially or originally contracts
for the loan.
Conversely, a large purchase
representing a significant portion of the
FICU’s net worth should require a full
review of the loan documentation before
approval. The Board expects a FICU to
establish the parameters for review,
including a periodic review for
appropriateness, and adhere to such
parameters.
C. § 701.22(b)—Requirements for Loan
Participation Purchases
The final rule reorganizes and revises
the provisions of §§ 701.22(b), (c), and
(d) of the current rule and consolidates
them into revised § 701.22(b). The
revised section also includes additional
details to improve clarity and address
safety and soundness concerns.
Specifically, revised § 701.22(b)
provides that a FICU may only purchase
a loan participation if the seller is an
eligible organization and if the loan is
one the FICU is empowered to grant
under applicable law and its own
internal loan policies. Empowered to
grant refers to a FICU’s authority to
make a loan under the FCU Act,
applicable state law, NCUA regulations,
and its own bylaws and internal
policies.12 Other requirements for
purchasing a loan participation include
adopting a written loan participation
agreement, establishing the borrower’s
membership in the originating FICU or
one of the participating FICUs by the
time the loan participation is purchased,
and having/evidencing a continuing
participation interest by the originating
lender for the loan’s duration. As further
discussed below, such continuing
interest by the originating lender must
be at least 5 percent of the outstanding
balance of the loan through the life of
the loan. As mandated by the FCU Act,
however, originating FCUs must retain
at least 10 percent.13
The final rule requires a FICU to
adopt a written loan participation
policy, and it requires the policy to
include certain provisions. Specifically,
a FICU’s loan participation policy must
address various concentration limits
and the maximum limit a FICU intends
to place on its outstanding loan
participations. The Board emphasizes
that there may be other factors a FICU
should consider in formulating a loan
participation policy based on its size,
complexity, and lending experience.
The Board expects a FICU to consider
all of these factors in establishing its
policy. For example, a FICU purchasing
a loan participation pool might perform
statistical sampling in evaluating the
underwriting standards of the pool.
1. Underwriting Standards—
§ 701.22(b)(5)(i)
Section 701.22(b)(5)(i) of the proposal
required a FICU to establish
underwriting standards for loan
participations meeting at least the same
underwriting standards the FICU uses
when it originates its own loan.
Consistent with this, the proposal also
eliminated an exception in
§ 701.22(c)(4) of the current rule, which
permits an FCU to purchase a loan
participation that was originated with
underwriting standards different than
its own.
While several commenters supported
this proposed provision, a majority
expressed concern that this aspect
would effectively limit a credit union’s
loan participation purchases to those
involving the types of loans that the
purchasing credit union originates.
Commenters suggested this could
significantly inhibit loan participation
programs. Commenters argued this
would undermine safety and soundness
by limiting diversification of credit
unions’ loan portfolios. They also stated
this would limit the pool of credit
unions to which originating credit
unions could sell participation interests.
After careful consideration of these
comments, the Board has determined to
modify the rule to permit a purchasing
credit union to participate in types of
loans it does not originate. The Board
recognizes that one of the principal
benefits of loan participation is greater
loan portfolio diversification.
Accordingly, the final rule permits a
FICU to purchase a participation in a
loan it is empowered to grant, even if it
does not originate that type of loan or
if the loan is underwritten using
standards other than those it uses when
originating loans. It does not prevent a
FICU from establishing different, or,
where appropriate, even less stringent,
underwriting standards for loan
participations than it uses when
originating its own loans. Moreover,
where a FICU both originates and
purchases participations in the same
types of loans, the FICU is permitted to
establish different underwriting
standards for originating such loans and
for purchasing participations in those
loans. For example, if a FICU is
empowered to grant MBLs, it may
12 See
13 12
OGC Op. 04–0713 (Oct. 25, 2004).
U.S.C. 1757(5)(E).
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establish in its loan policy two distinct
sets of underwriting standards, one for
purchasing participations in MBLs and
one for originating MBLs.
The Board emphasizes, however, that
a FICU must establish prudent
underwriting standards for loan
participations and conduct appropriate
due diligence before purchasing a loan
participation. Such due diligence
should be independently conducted by
the purchasing FICU or outsourced to a
qualified third party that is not
otherwise affiliated with the loan. A
purchasing FICU may not rely on an
originating lender’s due diligence.
2. Concentration Limits on Loan
Participations
As discussed in the preamble to the
proposal, in establishing concentration
limits on loan participations, the Board
sought to mitigate risk to the NCUSIF
without discouraging continued
growth.14 By instituting concentration
limits for loan participations that are
tied to net worth, the proposal aimed to
strike this balance by tying the
concentration limits to net worth. The
proposal also recognized the need for
FICUs to identify and manage
concentration risk on their balance
sheets. Key among these risks are
concentrations related to purchasing
from a single or too few originators,
loans to one or too few borrowers or a
group of associated borrowers, and too
many loans of a particular type.
The Board proposed to limit a FICU’s
loan participation purchases from any
one originator to a maximum of 25
percent of the FICU’s net worth, with no
provision for waiver. The Board also
proposed to limit a FICU’s loan
participation purchases involving any
one borrower or group of associated
borrowers to 15 percent of the FICU’s
net worth, unless the appropriate
regional director grants a waiver. The
Board requested public comment on the
appropriateness of these caps, how they
should be structured, and any
alternative approaches to them.
a. Single Originator Concentration Limit
A majority of commenters opposed
the proposed 25 percent net worth
limitation on loan participation
purchases from any one originator.
Some commenters supported the reason
for this limitation, but most indicated
that a 25 percent cap is too low.
Commenters stated that the proposed 25
percent limit would be cumbersome to
manage and immaterial to overall risk
mitigation. They also argued that the
limit could actually increase, rather
14 76
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than decrease, risk exposures, as credit
unions would be required to manage
and monitor multiple originators.
Some commenters disagreed that
purchasing participations from one
originator will necessarily increase
risks. These commenters argued that it
is more prudent to focus on
diversification of risk in a participation
portfolio than to limit purchases from a
single originator. Other commenters
observed that the quality of the
underlying loans determines the level of
potential risk more than the originating
lender. Commenters also raised
concerns that the proposed limit failed
to consider the differences in the types
of loans being participated. For
example, large pools of auto loans
represent multiple streams of
repayment, whereas an equal dollar
amount of mortgage or commercial
loans may rely on a far less diverse
stream of repayment. These commenters
contended it is unreasonable for the
proposal to limit all of a FICU’s
participation purchases from any one
originator, which are spread out over
many loans and borrowers, to 25
percent of net worth, when under the
MBL rule, a FICU could make one loan
to one borrower in the amount of up
to15 percent of net worth.15
Several commenters also stated that
there is no similar concentration limit in
banking regulations. These commenters
believed that the proposed limitation
would arbitrarily disadvantage credit
union loan participation programs in
comparison to banks.
Commenters also expressed concern
that the requirement would disrupt
established, effective relationships with
originators. Many noted that a
purchasing credit union may have years
of experience dealing with only one or
a few originators. These credit unions
would be forced to seek out new
relationships. Commenters indicated
that it takes a significant amount of time
and resources to establish strong
relationships with originators and the
proposal would mitigate the value of
those existing relationships. In addition,
commenters argued that the proposed
limitation would have a
disproportionately negative impact on
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smaller credit unions by increasing due
diligence costs. Also, many smaller
credit unions may not have the capacity
or expertise to monitor multiple
originators.
Similarly, several commenters
suggested that the proposal would have
a disproportionately negative impact on
certain originators. For example, there
are only a limited number of originators
of taxi medallion loans. Moreover,
commenters stated that originators on
the whole would be negatively impacted
because the proposed restriction would
limit the pool of available participant
purchasers.
Commenters also raised concerns that
the proposed limitation would impact a
particular CUSO model. Under this
model, in order to aggregate resources
for lending expertise, credit unions form
a CUSO to originate mortgage or
business loans in either the CUSO’s
name or in an owner credit union’s
name. The originating lender then sells
loan participation interests to the
CUSO’s other owner credit unions.
Commenters indicated that, if the
proposed 25 percent single originator
limit were adopted, many credit unions
involved in these types of CUSOs would
be immediately out of compliance with
the new rule due to the
interconnectedness that is inherent in
this business model.
The Board is sensitive to these
concerns. As noted above, in prescribing
concentration limits on loan
participations, the Board seeks to strike
an appropriate balance between
mitigating risk and fostering the
industry’s growth and stability. Upon
consideration of commenters’ feedback,
the Board believes that a higher, more
flexible cap for loan participations
involving a single originator is
appropriate.
Some commenters suggested the cap
should be removed entirely, or that
certain exemptions from the single
originator limitation should be
provided. Most commenters, however,
favored keeping the single originator
cap, but advocated a higher limit. A
number of commenters suggested that a
higher concentration limit should be
permitted for loans originated by
CAMEL 1 or 2 FICUs. One commenter
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argued that the limit should be 400
percent of net worth. Another
commenter suggested that the limit be
100 percent of capital. Commenters also
suggested that if the loan-to-value ratio
of the underlying loans is under 75
percent, a higher limit should be
permitted. A significant number of
commenters also requested that the rule
permit waivers from the single
originator concentration limit.
Based on the comments, the Board
has determined to substantially raise the
single originator cap. The final rule
includes a single originator cap not to
exceed the greater of $5 million or 100
percent of net worth. The Board
continues to believe that net worth is
the appropriate measure for this cap.
Net worth cushions fluctuations in
earnings, supports growth, and provides
protection against insolvency. As the
reserve of funds available to absorb
losses, it is the best measure to gauge a
credit union’s risk exposure. The Board
believes a limit of 100 percent of net
worth provides sufficient concentration
risk mitigation, yet is not too restrictive
as to adversely impact a significant
number of credit unions.
NCUA does not currently collect the
amount of loan participations purchased
from a particular originator on the
quarterly 5300 Call Report. Using
reasonable assumptions, however, the
agency is able to gauge some of the
impact this limit may have on the
industry. For example, assuming all
loan participations were purchased from
one originator, only 79 of the 1,316
FICUs reporting purchased loan
participations outstanding were over the
100 percent net worth limit as of
December 31, 2012. In fact, this is a
conservative analysis and likely
overstates the number of FICUs over the
aggregate limit, as many credit unions
purchase participations from multiple
originators. Therefore, the following
table illustrates the difference in the
number of affected credit unions,
depending on the number of
originators 16 and the single originator
limit in effect:
16 Assuming an equal amount of loan
participations would be purchased from each
originator.
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Number of
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Number of FICUs exceeding the single
originator limit of 25 percent of net worth
..................
..................
..................
..................
483
251
144
79
In light of these considerations, the
Board believes the 100 percent of net
worth concentration limit in the final
rule addresses commenters’ major
concerns regarding the single originator
concentration limit.
The Board also recognizes that a flat
percentage threshold, even if
significantly raised, may not address
commenters’ concerns that the proposed
concentration limit would unfairly
disadvantage smaller credit unions. The
final rule also includes a dollar
threshold of $5 million to address these
specific concerns. The dollar limit was
added to reduce the potential adverse
impact on small credit unions with
lower net worth in terms of dollar
amount. Indeed, as illustrated in the
table above, when the threshold of ‘‘the
greater of $5 million or 100 percent of
net worth’’ was applied, the number of
credit unions exceeding the limit fell
from 79 to 39. Of these 39 credit unions,
only 8 exceeded the limit based on the
$5 million threshold, which was higher
than their total net worth. The Board
notes the $5 million limit poses a
relatively small risk to the NCUSIF and
generally correlates with NCUA’s
recently amended definition of small
entity for purposes of the Regulatory
Flexibility Act.17 For example, with
aggregate industry net worth at over 10
percent, a $50 million credit union
would have approximately $5 million in
net worth.18 As total assets and net
worth increase, however, the percentage
of net worth threshold would become
the prevailing limit.
Additionally, the final rule allows a
FICU to apply for a waiver from the
single originator concentration limit.
Waivers are discussed in more detail
below. The Board believes that with
these substantial adjustments, the final
rule achieves the agency’s key objective
of mitigating risk to the NCUSIF while
providing FICUs with sufficient
flexibility to meet their operational
needs.
Several commenters requested
clarification on whether a credit union
that purchases loan participation
17 78
FR 4032 (Jan. 18, 2013).
non-dollar weighted average net worth
ratio for FICUs under $50 million was 14.30% as
of December 31, 2012, while the aggregate net worth
ratio for the under $50 million group was 12.44%.
18 The
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17
9
7
interests from both a CUSO and the
CUSO’s owner credit union has
purchased from one or two originators.
The Board notes that a CUSO is an
individual business that is a distinct
and separate entity from any credit
union that lends to it or invests in it.
NCUA’s CUSO regulation requires that
a CUSO and a credit union that owns all
or part of it must be operated in a
manner that demonstrates to the public
the separate corporate existence of each
entity.19 For example, each separate
entity must operate so that ‘‘its
respective business transactions,
accounts, and records are not
intermingled.’’20 As such, purchases of
participation interests in loans
originated by a CUSO will not be
aggregated with participation interests
in loans originated by the CUSO’s
owner credit union for purposes of the
single originator limit. They will be
treated as two separate originators. The
Board emphasizes, however, that CUSO
arrangements must not be used to
circumvent the requirements of the final
rule. For example, FICUs may not
circumvent the rule by establishing
‘‘round-robin’’ participation
arrangements in which participants take
turns as the originating lender in order
to effectively distribute the single
originator concentration limit among
multiple parties.
b. Single Borrower Concentration Limit
A number of commenters expressed
support for the proposed 15 percent of
net worth concentration limit on the
purchase of participations of loans made
to any one borrower or group of
borrowers. Some commenters supported
the reason for this limitation, but
maintained that each credit union
should be permitted to establish its own
individual limit by internal policy. In
general, however, most commenters
believed the 15 percent limit was
reasonable, with many noting its
consistency with the loan to one
borrower limit in the MBL rule.
Other commenters disagreed with the
proposed requirement, asserting that the
limitation is duplicative because the
MBL rule already imposes a similar
19 12
20 12
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CFR 712.4(a)(1).
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5
1
0
limit. These commenters also argued
that adequate underwriting and due
diligence are sufficient safeguards,
thereby obviating the need for a
regulatory limitation.
The Board believes the 15 percent
limitation appropriately balances the
need to mitigate borrower concentration
risk with the need for FICUs’ flexibility
in making credit decisions. As such, the
limit is adopted in the final rule as
proposed. While this limit is similar to
the loan to one borrower limit in the
MBL rule, they are not duplicative
because not all loan participations are
business-related loans subject to the
MBL rule. The limit in this final rule
applies to both MBL and non-MBL
participations. Further, including the
limit in the loan participation rule
clarifies that MBL originations and MBL
participations are both subject to the 15
percent single borrower limit. Thus, the
Board believes that the limitation in the
loan participation rule is warranted. The
provision allowing FICUs to apply for
waivers from this limit also is adopted
in the final rule as proposed.
c. Self-Imposed Concentration Limits
The proposal required a FICU’s loan
participation policy to establish selfimposed limits on the amount of loan
participations that a FICU may purchase
by loan type, not to exceed a specified
percentage of the credit union’s net
worth. Most commenters either
supported, or did not comment on, this
aspect of the proposal.
As such, the provision is adopted as
proposed. The Board reiterates that it is
important for a FICU to clearly identify
and set reasonable limits. Consistent
with NCUA guidance on the evaluation
of concentration risk, concentration
limits should be established
commensurate with a FICU’s net
worth.21
d. Grandfathering
A FICU that exceeds the single
originator or single borrower
concentration limits as of the effective
date of this final rule will be
grandfathered and will not be required
to divest of any loan participations it
holds at that time. The FICU will not be
21 Letter to Credit Unions 10–CU–03,
Concentration Risk (Mar. 2010).
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permitted to purchase any additional
participations after that time, however,
and its participation portfolio must
decrease as participations are paid off or
sold until its portfolio complies with
regulatory concentration limits. A FICU
may purchase additional participations
if its portfolio is below regulatory
concentration limits, but only in an
amount up to the regulatory
concentration limits, not up to its
previously grandfathered amount.
D. § 701.22(c)—Waivers
In the proposed rule, the Board sought
public comment on the agency’s waiver
process. Commenters identified a
number of general concerns, including:
(1) The perception that examiners
discourage credit unions from seeking a
waiver; (2) delayed or slow responses
from NCUA regarding waiver
applications; (3) lack of adequate
explanations for NCUA denials of
waiver requests; and (4) poor examiner
feedback concerning waiver
applications.
The Board finds the discussion on
waivers helpful. Since the loan
participation rule was originally
proposed in December 2011, NCUA has
taken, and continues to take, significant
steps to improve and clarify NCUA’s
overall waiver process. For example,
NCUA’s National Supervision Policy
Manual (NSPM) contains a chapter on
waivers to enhance consistency in
waiver processing procedures and
timeframes. Additionally, NCUA
recently issued a Supervisory Letter on
evaluating credit union requests for
waivers of provisions in the MBL rule.22
With respect to waiver requests to be
made pursuant to this final rule, FICUs
are encouraged to contact NCUA
examiners for guidance and assistance
prior to submitting a waiver application.
A FICU’s examiner may offer guidance
on how the regional office may evaluate
a waiver request because the regional
office typically asks for the examiner’s
input before making a final decision.
The Board emphasizes that regardless of
the examiner’s feedback, it remains a
FICU’s right to request a waiver.
Further, it remains the regional
director’s decision to approve or
disapprove a waiver request irrespective
of any input the examiner may have
shared with a FICU. Regional offices
will process complete waiver
applications as expeditiously as
possible on a first-in, first-out basis. The
NSPM outlines specific timeframes for a
regional office to respond to a waiver
request. The NSPM requires a response
22 Letter to Credit Unions 13–CU–02, Member
Business Loan Waivers (Feb. 22, 2013).
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within 45 days unless otherwise
mandated by regulation. The NSPM also
contains standard templates for various
types of waiver response letters and
provides guidance on the information
that would typically be addressed in the
response, including specific reasons for
denying a waiver.23
Several commenters asserted that the
authority to grant waivers for FISCUs
should reside with the state regulators,
with notice to NCUA. Alternatively,
commenters suggested waivers for
FISCUs should require the concurrence
of the state regulators. The Board
continues to believe that it is
appropriate for NCUA, as administrator
of the NCUSIF, to approve or
disapprove waiver requests but it agrees
that waivers for FISCUs should require
the concurrence of the appropriate state
supervisory authority. The final rule has
been revised accordingly.
Commenters also suggested that
approvals should be deemed granted if
NCUA fails to act within a prescribed
time period. The Board believes waiver
determinations must be rendered
timely. Consistent with the NSPM, the
final rule provides that the regional
director will notify the FICU of the
waiver decision within 45 calendar days
of receiving a fully completed waiver
request. Waiver determinations are
appealable to the Board within 60 days.
Finally, a number of commenters
suggested that if an originator obtains a
waiver for a loan, then a participating
credit union should not have to also
obtain a waiver for that loan.
Commenters also suggested that waivers
should be made available to FICUs in
advance to permit them to complete
transactions consistent with preapproved guidelines, with subsequent
notice to its regional office.
The Board agrees that if an originating
lender obtains a waiver for a loan, the
participating credit unions do not also
have to obtain a waiver. If, however, the
originating lender does not obtain a
waiver for a loan, each participant is
required to obtain its own waiver for its
interest in the participated loan. In other
words, a participating credit union’s
waiver does not pass to other
participants.
A waiver from the single originator
limit is somewhat less time-sensitive for
a loan participation purchase than it is
for granting an MBL. For example, a
waiver to exceed 100 percent of net
worth to any one originator does not
affect purchases of loan participations
from originators that are not near the
credit union’s cap. Thus, a credit union
may purchase participations from other
23 See
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37953
originators while awaiting approval of
its waiver request. Nevertheless, a
purchasing credit union should
anticipate the need for a waiver and
submit a waiver application as early in
the transaction process as possible.
Blanket waivers may be granted under
appropriate circumstances.
The final rule allows NCUA to grant
waivers from both the single originator
and single borrower concentration
limitations. To further clarify the waiver
process, the final regulatory text
articulates NCUA’s expectations for
FICUs requesting waivers and NCUA’s
obligations in reviewing such in
§ 701.22(c).24 In order for the regional
director to review and process waiver
applications as expeditiously as
possible, a FICU should include in its
waiver application the following
information:
• A copy of all pertinent lending
policies and underwriting standards;
• The requested higher limit;
• An explanation of the need for
increasing the limit;
• Documentation supporting the
credit union’s ability to manage and
monitor this activity, including existing
risk mitigation measures;
• Analysis of the credit union’s prior
experience with this type of loan;
• The loan participation master
agreement;
• Servicing agreements/contracts, if
applicable; and
• Documentation supporting the
resolution of any material problems
identified in the most recent exam
report’s Document of Resolution or any
outstanding administrative actions.
Stronger support would be expected if
a problem relates to loan participations,
the type of loan the credit union wants
to purchase, or existing waivers.
Prior to the effective date of this final
rule, NCUA intends to issue supervisory
guidance on evaluating credit union
requests for waivers of provisions in the
loan participation rule.
E. § 701.22(d)—Minimum Requirements
for a Loan Participation Agreement
The final rule revises current
§ 701.22(b)(2), which requires loan
participation agreements to be in
writing. It moves agreement-related
requirements to revised paragraph
§ 701.22(d). The Board recognizes that a
successful loan participation
relationship depends, in large part, on
the quality and completeness of the
participation agreement. A well-written
24 Proposed § 701.22(c) addressed the minimum
requirements for a loan participation agreement.
The agreement-related requirements have been
moved to § 701.22(d) in the final rule.
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agreement can minimize intercreditor
conflicts during the life of the loan,
especially if the loan becomes
delinquent. Accordingly, the Board
believes that any participation
agreement must clearly delineate the
roles, duties, and obligations of the
originating lender, servicer, and
participants. In the final rule, revised
§ 701.22(d) enumerates the issues a loan
participation agreement must, at a
minimum, address in order for a FICU
to purchase the loan participation. For
example, a loan participation agreement
must include a provision requiring an
originating lender to retain a certain
percentage interest in the loan
throughout its duration. As discussed in
more detail below, as mandated by the
FCU Act, the final rule requires
originating FCUs to retain at least 10
percent of the outstanding balance of
the loan through the life of the loan.25
The loan participation agreement must
require originating FISCUs, PISCUs,
CUSOs, and other eligible organizations
to retain at least 5 percent, or higher,
depending on applicable state law.
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.
These provisions emphasize the need
for adequate documentation and due
diligence from before the time of
purchase throughout the life of the loan.
Under § 701.22(d)(4)(i), a loan
participation agreement must specify
the loan or loans in which a credit
union is purchasing an interest. Where,
for example, a participation agreement
involves multiple loans, the
documentation can be as simple as an
addendum or schedule for identifying
each loan and a participant’s interest in
that loan. This provision also clarifies
the existing prohibition against
purchasing a participation certificate in
a pool of loans.
1. Risk Retention Requirement on
Originating Lender
As noted above, the FCU Act
mandates the 10 percent originating
lender retention requirement for
FCUs.26 While some commenters
disagreed, most generally supported
extending a similar risk retention
requirement to FISCUs. Of the
supporters, most agreed that 10 percent
is reasonable, although many suggested
10 percent is too high. A number of
commenters recommended 5 percent as
more appropriate. Other commenters
suggested various alternative thresholds.
In addition, several commenters
contended that state law should control
the risk retention requirement for
FISCUs. Commenters also suggested that
any originator in which a participating
credit union has a direct or indirect
ownership interest (i.e., a CUSO) should
be exempt from any risk retention
requirement.
The Board believes that, to minimize
risk to the NCUSIF, a meaningful risk
retention requirement should apply to
all originators, without exception. Loan
participation activities pose risks to the
NCUSIF irrespective of the originating
lender’s charter type. Requiring the
originating lender to retain an economic
interest in the participated loan
incentivizes the originator to lend more
responsibly because it will have ‘‘skin
in the game.’’ As some commenters
noted, the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(Dodd-Frank Act) 27 imposed new risk
retention requirements to address
problems in the securitization markets
by requiring that securitizers retain an
economic interest in the credit risk of
the assets they securitize. Specifically,
section 15G of the Securities Exchange
Act of 1934, added by section 941(b) of
the Dodd-Frank Act, generally requires
the securitizer of asset-backed securities
(ABS) to retain not less than 5 percent
of the credit risk of the assets
collateralizing the ABS.28 By requiring
securitizers to retain an economic
interest in a material portion of the
credit risk for assets being securitized,
Congress intended the retention
requirement to encourage sound lending
practices by creating strong incentives
for securitizers to monitor the quality of
the assets underlying a securitization
transaction.29 As noted in the legislative
history, ‘‘[w]hen securitizers retain a
material amount of risk, they have ‘skin
in the game,’ aligning their economic
interest with those of investors in assetbacked securities.’’ 30
While the FCU Act does not impose
a retention requirement on originating
FISCUs, PISCUs, CUSOs, or other
eligible organizations, NCUA has long
interpreted the FCU Act to require an
originating lender to retain a meaningful
ownership interest in the loan to be
considered a participant and for the
transaction to qualify as a loan
participation. Further, as noted above,
the Board has long expressed concerns
that an originating lender may be
27 Public
Law 111–203 (2010).
U.S.C. 78o–11.
29 See S. Rept. 176, 111th Cong., at 212 (2010).
30 S. Rept. 176, 111th Cong., at 129 (2010).
disinclined to properly underwrite a
loan if it can later mitigate its risk by
selling participation interests in the
loan.31
Nevertheless, the Board supports and
encourages the dual chartering system.
Upon review of the comments, the
Board believes NCUA can achieve the
above-stated safety and soundness
objectives with a retention requirement
that is less stringent than the proposed
10 percent threshold. Consistent with
the Dodd-Frank Act’s risk retention
standard, the Board believes a 5 percent
minimum retention requirement
provides a significant economic stake
for originators without being overly
restrictive. Accordingly, the final rule
provides that, in order for a FICU to
purchase a loan participation from an
eligible organization, the loan
participation agreement must require
the originating lender to retain at least
5 percent of the outstanding balance of
the loan through the life of the loan,
unless applicable state law establishes a
higher retention threshold. This
minimum 5 percent retention
requirement applies to all originating
eligible organizations, including
FISCUs, PISCUs, CUSOs, banks and
other financial organizations. If the
originating lender is an FCU, consistent
with the FCU Act, the agreement must
require the originating FCU to retain at
least 10 percent of the loan. The Board
emphasizes that, under the final rule,
FCUs may purchase loan participations
from non-FCU originating lenders that
retain at least 5 percent of the face
amount of the loan for the loan’s
duration. The 10 percent retention
requirement for FCUs applies only
where the FCU is the originating lender
in a participation arrangement.
F. Related Regulatory Provisions
1. Sec. 701.23—Purchase, Sale, and
Pledge of Eligible Obligations
The proposal added introductory text
to § 701.23 to clarify the scope of
§ 701.23 and to distinguish transactions
under § 701.23 from transactions
covered by § 701.22. The final rule
adopts the additional language
substantially as proposed, but with
some amendments to conform it to a
2012 final rule promulgated by NCUA
eliminating the Regulatory Flexibility
Program (RegFlex).32 The final rule
regarding RegFlex provides a limited
exception to the general requirement
that an FCU’s purchase, sale, or pledge
of all or part of a loan must be to one
28 15
25 12
U.S.C. 1757(5)(E).
26 Id.
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31 See
32 77
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56 FR 15036 (Apr. 15, 1991).
FR 31981 (May 31, 2012).
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of its own members.33 Specifically, the
exception permits FCUs that meet the
well capitalized standard to buy loans
from other FICUs without regard to
whether the loans are eligible
obligations of the purchasing FCU’s
members or the members of a
liquidating credit union. The final rule
also makes a parallel conforming
amendment to the introductory text to
§ 701.22 in this regard.
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2. Sec. 741.8—Purchase of Assets and
Assumption of Liabilities
Section 741.8 is a safety and
soundness provision that requires, with
limited exceptions, all FICUs to receive
approval from NCUA before purchasing
loans or assuming an assignment of
deposits, shares, or liabilities from any
entity that is not insured by the
NCUSIF. Currently, there are no
exceptions under § 741.8 for loan
participation purchases but in practice
an FCU is not required to obtain
separate regional director approval for
loan participation purchases that
comply with the requirements of the
loan participation rule. The proposed
rule amended § 741.8 for consistency
with this current agency practice. The
final rule inserts language in § 741.8
specifying that regional director
approval is not required under § 741.8
for a FICU’s loan participation purchase
that complies with the requirements in
§ 701.22. The exclusion applies to both
FCUs and FISCUs. The finalized
language is unmodified from the
proposal.
3. Sec. 741.225—Loan Participations
The proposed rule amended Part 741
by adding a new § 741.225 to extend the
requirements of § 701.22 to FISCUs,
noting there are strong indications of
potential risk to the NCUSIF from
FISCUs’ loan participation activity. A
number of commenters expressed
concern that the proposal would
significantly undermine the dual
chartering system, contending that state
law should govern loan participations
for FISCUs. Several commenters also
questioned whether the data presented
in the proposal was sufficient to justify
extending the loan participation rule’s
coverage to FISCUs.
While the Board supports and
encourages the dual chartering system,
FISCUs’ increasing loan participation
activity presents significant potential
risk to the NCUSIF, as discussed in the
preamble to the proposed rule.34 Since
year-end 2007, FISCUs have been
responsible for approximately 54
33 12
34 76
CFR 701.23(b)(2).
FR 79548, 79550 (Dec. 22, 2011).
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percent of participation loans purchased
and 61 percent of participation loans
sold. FISCUs have also consistently
accounted for the majority of loan
participations outstanding. Over that
same five-year period, FISCUparticipated loan balances have
increased 31.4 percent, from $5.7 billion
in December 2007 to $7.5 billion in
December 2012. As of December 30,
2012, although FISCUs represented only
37.4 percent of all federally insured
credit unions, FISCUs held 54.4 percent
of loan participations outstanding.
Among the 20 FICUs with the highest
amount of participation loans
outstanding, 12 (or 60 percent) were
FISCUs.
Since 2007, FISCUs overall
experienced a higher delinquency rate
in their loan participation portfolios. At
year-end 2012, for example, the
delinquency rate for the FISCUparticipated portfolio was 2.18 percent,
compared to 1.27 percent for FCUs. Of
the 78 federally insured credit unions
reporting over 10 percent delinquency
on participation loans, 52 (or 66.7
percent) were FISCUs. With regard to
actual losses, charge-off data for the last
few years indicates FISCUs have
experienced higher losses on
participation loans than FCUs. Indeed,
the average net charge-off rate for
FISCUs for 2010–2012 was 1.48 percent,
compared with 0.77 percent for FCUs.
Even though net charge-offs on
participation loans fell for both FISCUs
and FCUs in 2012 with the improving
economy, the year-end net charge-off
rate for FISCUs was more than double
the net charge-off rate for FCUs (1.46
percent vs. 0.62 percent).
Furthermore, the Board believes some
safety and soundness requirements
should be applied to all FICUs to
minimize risk to the NCUSIF. FISCU
involvement in loan participations
currently is subject only to state law,
which may vary from NCUA’s
regulations and from state to state.
Section 201 of the FCU Act states the
Board is authorized to insure the
member accounts of state-chartered
credit unions that have applied to, and
been approved by, NCUA for federal
insurance coverage. Credit unions
receiving federal insurance must agree
to comply with the requirements of Title
II and any regulations prescribed by the
Board pursuant to Title II. Section
741.225 is being added to Part 741
pursuant to this authority for the
reasons discussed above. The final rule
adopts § 741.225 substantively as
proposed, with one minor change to
clarify that FISCUs, but not FCUs, are
exempt from § 701.22(b)(4).
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IV. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
requires NCUA to prepare an analysis to
describe any significant economic
impact any regulation may have on a
substantial number of small entities.35
For purposes of this analysis, NCUA
considers credit unions having under
$50 million in assets small entities.36
There were 4,604 credit unions under
$50 million as of December 31, 2012.
398 small FICUs reported participations
outstanding at year-end 2012. In
addition, 177 reported purchasing
participations, and 50 reported selling
participations in 2012.37
NCUA does not believe the final rule
will have a significant impact on a
substantial number of small credit
unions. Loan participations are a means
for institutions to diversify risk and to
employ excess lending capacity.
Generally, smaller credit unions are not
actively involved in loan participation
transactions. The $5 million threshold
and the waiver process will further limit
the impact on small credit unions.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) applies to rulemakings in which
an agency by rule creates a new
paperwork burden on regulated entities
or modifies an existing burden.38 For
purposes of the PRA, a paperwork
burden may take the form of either a
reporting or a recordkeeping
requirement, both referred to as
information collections.
The final rule contains an information
collection in the form of a written policy
requirement and a transaction
documentation requirement. All FICUs
purchasing loan participations must
have a written loan participation policy.
In addition, before purchasing a loan
participation, a FICU must enter into a
written loan participation agreement
that specifically identifies the subject
loans and other material information. As
required by the PRA, NCUA has
submitted a copy of this final rule to
OMB for its review and approval.
Persons interested in submitting
comments with respect to the
information collection aspects of the
proposed IRPS should submit them to
OMB at the address noted below.
35 5
U.S.C. 603(a).
Ruling and Policy Statement 87–2.
52 FR 35231. (Sept. 18, 1987), as amended by IRPS
03–2, 68 FR 31949 (May 29, 2003) and IRPS 13–1
78 FR 4032 (Jan. 18, 2013).
37 There is overlap between these three groups of
small credit unions involved with participations.
38 44 U.S.C. 3507(d); 5 CFR part 1320.
36 Interpretive
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Based on NCUA’s experience, credit
unions generally maintain written loan
participation policies and enter into
written agreements when purchasing
loan participations. As such, they will
only need to modify their practices to
comply with the final rule. It is,
therefore, NCUA’s view that
maintaining a written loan participation
policy and executing written
participation purchase agreements are
not new burdens created by this
regulation. 1,482 FICUs reported
participations outstanding at year-end
2012. Based on the current volume of
reported loan participation activity,
NCUA estimates approximately 1,482
FICUs will need to modify a written
loan participation policy. NCUA further
estimates it should take a credit union
an average of 4 hours to modify its loan
participation policy. The total annual
burden imposed is approximately 5,928
hours. With regard to executing a
written loan participation agreement,
NCUA estimates the regulation will
cause no additional burden.
NCUA considers comments by the
public on this proposed collection of
information in:
• Evaluating whether the proposed
collection of information is necessary
for the proper performance of the
functions of the NCUA, including
whether the information will have a
practical use;
• Evaluating the accuracy of the
NCUA’s estimate of the burden of the
collection of information, including the
validity of the methodology and
assumptions used;
• Enhancing the quality, usefulness,
and clarity of the information to be
collected; and
• Minimizing the burden of collection
of information on those who are
required to respond, including through
the use of appropriate automated,
electronic, mechanical, or other
technological collection techniques or
other forms of information technology;
e.g., permitting electronic submission of
responses.
Comments on the information
collection requirements should be sent
to: Office of Information and Regulatory
Affairs, OMB, New Executive Office
Building, 725 17th Street, NW.,
Washington, DC 20503; Attention:
NCUA Desk Officer, with a copy to
Mary Rupp, Secretary of the Board,
National Credit Union Administration,
1775 Duke Street, Alexandria, Virginia
22314–3428.
C. Executive Order 13132
Executive Order 13132 encourages
independent regulatory agencies to
consider the impact of their actions on
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state and local interests. In adherence to
fundamental federalism principles,
NCUA, an independent regulatory
agency,39 voluntarily complies with the
Executive Order. Among others, the
final rule applies to federally insured,
state-chartered credit unions. By law,
these institutions are already subject to
numerous provisions of NCUA’s rules,
based on the agency’s role as the insurer
of member share accounts and the
significant interest NCUA has in the
safety and soundness of their
operations. The final rule may have an
occasional direct effect on the states, the
relationship between the national
government and the states, or on the
distribution of power and
responsibilities among the various
levels of government. This final rule
may supersede provisions of state law,
regulation, or approvals. The final rule
could lead to conflicts between the
NCUA and state financial institution
regulators on occasion; however, based
on comments received on the proposed
rule, NCUA has made modifications in
this final rule to minimize conflicts in
this area. For example, as discussed
above, the final rule provides that for
originating lenders that are FISCUs, the
minimum risk retention requirement is
5 percent, unless applicable state law
establishes a higher retention threshold.
In addition, waivers for FISCUs from
any provision of the final rule will
require the concurrence of the
appropriate state supervisory authority.
D. The Treasury and General
Government Appropriations Act, 1999—
Assessment of Federal Regulations and
Policies on Families
NCUA has determined that this final
rule will not affect family well-being
within the meaning of section 654 of the
Treasury and General Government
Appropriations Act, 1999.40
E. Small Business Regulatory
Enforcement Fairness Act
The Small Business Regulatory
Enforcement Fairness Act of 199641
(SBREFA) provides generally for
congressional review of agency rules. A
reporting requirement is triggered in
instances where NCUA issues a final
rule as defined by Section 551 of the
Administrative Procedure Act.42 NCUA
does not believe this final rule is a
‘‘major rule’’ within the meaning of the
relevant sections of SBREFA. NCUA has
submitted the rule to the Office of
39 44
U.S.C. 3502(5).
Law 105–277, 112 Stat. 2681 (1998).
41 Public Law 104–121, 110 Stat. 857 (1996).
42 5 U.S.C. 551.
40 Public
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Management and Budget for its
determination in that regard.
List of Subjects
12 CFR Part 701
Credit unions, Fair housing,
Individuals with disabilities, Insurance,
Marital status discrimination,
Mortgages, Religious discrimination,
Reporting and recordkeeping
requirements, Sex discrimination, Signs
and symbols, Surety bonds.
12 CFR Part 741
Credit, Credit unions, Reporting and
recordkeeping requirements, Share
insurance.
12 CFR Part 742
Credit unions.
By the National Credit Union
Administration Board, on June 20, 2013.
Mary F. Rupp,
Secretary of the Board.
For the reasons discussed above, the
NCUA Board amends 12 CFR part 701
as follows:
PART 701—ORGANIZATION AND
OPERATION OF FEDERAL CREDIT
UNIONS
1. The authority citation for part 701
continues to read as follows:
■
Authority: 12 U.S.C. 1752(5), 1757, 1765,
1766, 1781, 1782, 1787, 1789; Title V, Pub.
L. 109–351, 120 Stat. 1966.
■
2. Revise § 701.22 to read as follows:
§ 701.22
Loan participations.
This section applies only to loan
participations as defined in paragraph
(a) of this section. It does not apply to
the purchase of an investment interest
in a pool of loans. This section
establishes the requirements a federally
insured credit union must satisfy to
purchase a participation in a loan. This
section applies only to a federally
insured credit union’s purchase of a
loan participation where the borrower is
not a member of that credit union and
where a continuing contractual
obligation between the seller and
purchaser is contemplated. Generally, a
federal credit union’s purchase of all or
part of a loan made to one of its own
members, subject to a limited exception
for certain well capitalized federal
credit unions in § 701.23(b)(2), where no
continuing contractual obligation
between the seller and purchaser is
contemplated, is governed by § 701.23
of this part. Federally insured, statechartered credit unions are required by
§ 741.225 of this chapter to comply with
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the loan participation requirements of
this section. This section does not apply
to corporate credit unions, as that term
is defined in § 704.2 of this chapter.
(a) For purposes of this section, the
following definitions apply:
Associated borrower means any
borrower with a shared ownership,
investment, or other pecuniary interest
in a business or commercial endeavor
with the borrower. This includes
guarantors, co-signors, major
stakeholders, owners, investors,
affiliates and other parties who have
influence on the management, control,
or operations of the borrower.
Credit union means any federal or
state-chartered credit union.
Credit union organization means any
credit union service organization
meeting the requirements of part 712 of
this chapter. This term does not include
trade associations or membership
organizations principally composed of
credit unions.
Eligible organization means a credit
union, credit union organization, or
financial organization.
Financial organization means any
federally chartered or federally insured
financial institution; and any state or
federal government agency and its
subdivisions.
Loan participation means a loan
where one or more eligible
organizations participate pursuant to a
written agreement with the originating
lender, and the written agreement
requires the originating lender’s
continuing participation throughout the
life of the loan.
Originating lender means the
participant with which the borrower
initially or originally contracts for a loan
and who, thereafter or concurrently
with the funding of the loan, sells
participations to other lenders.
(b) A federally insured credit union
may purchase a participation interest in
a loan from an eligible organization only
if the loan is one the purchasing credit
union is empowered to grant and the
following additional conditions are
satisfied:
(1) The purchase complies with all
regulatory requirements to the same
extent as if the purchasing federally
insured credit union had originated the
loan, including, for example, the loansto-one-borrower provisions in
§ 701.21(c)(5) of this part for federal
credit unions and § 723.8 of the member
business loans rule in part 723 of this
chapter for all federally insured credit
unions;
(2) The purchasing federally insured
credit union has executed a written loan
participation agreement with the
originating lender and the agreement
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meets the minimum requirements for a
loan participation agreement as
described in paragraph (d) of this
section;
(3) The originating lender retains an
interest in each participated loan. If the
originating lender is a federal credit
union, the retained interest must be at
least 10 percent of the outstanding
balance of the loan through the life of
the loan. If the originating lender is any
other type of eligible organization, the
retained interest must be at least 5
percent of the outstanding balance of
the loan through the life of the loan,
unless a higher percentage is required
under applicable state law;
(4) The borrower becomes a member
of one of the participating credit unions
before the purchasing federally insured
credit union purchases a participation
interest in the loan; and
(5) The purchase complies with the
purchasing federally insured credit
union’s internal written loan
participation policy, which, at a
minimum, must:
(i) Establish underwriting standards
for loan participations;
(ii) Establish a limit on the aggregate
amount of loan participations that may
be purchased from any one originating
lender, not to exceed the greater of
$5,000,000 or 100 percent of the
federally insured credit union’s net
worth, unless this amount is waived by
the appropriate regional director, and,
in the case of a federally insured, statechartered credit union, with prior
written concurrence of the appropriate
state supervisory authority;
(iii) Establish limits on the amount of
loan participations that may be
purchased by each loan type, not to
exceed a specified percentage of the
federally insured credit union’s net
worth; and
(iv) Establish a limit on the aggregate
amount of loan participations that may
be purchased with respect to a single
borrower, or group of associated
borrowers, not to exceed 15 percent of
the federally insured credit union’s net
worth, unless waived by the appropriate
regional director, and, in the case of a
federally insured, state-chartered credit
union, with prior written concurrence of
the appropriate state supervisory
authority.
(c) To seek a waiver from any of the
limitations in paragraph (b) of this
section, a federally insured credit union
must submit a written request to its
regional director with a full and detailed
explanation of why it is requesting the
waiver. Within 45 days of receipt of a
completed waiver request, including all
necessary supporting documentation
and, if appropriate, any written
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37957
concurrence, the regional director will
provide the federally insured credit
union a written response. The regional
director’s decision will be based on
safety and soundness and other
considerations; however, the regional
director will not grant a waiver to a
federally insured, state-chartered credit
union without the prior written
concurrence of the appropriate state
supervisory authority. A federally
insured credit union may appeal any
part of the waiver determination to the
NCUA Board. Appeals must be
submitted through the regional director
within 60 days of the date of the
determination.
(d) A loan participation agreement
must:
(1) Be properly executed by
authorized representatives of all parties
under applicable law;
(2) Be properly authorized by the
federally insured credit union’s board of
directors or, if the board has so
delegated in its policy, a designated
committee or senior management
official, under the federally insured
credit union’s bylaws and all applicable
law;
(3) Be retained in the federally
insured credit union’s office (original or
copies); and
(4) Include provisions which, at a
minimum, address the following:
(i) Prior to purchase, the identification
of the specific loan participation(s)
being purchased, either directly in the
agreement or through a document which
is incorporated by reference into the
agreement;
(ii) The interest that the originating
lender will retain in the loan to be
participated. If the originating lender is
a federal credit union, the retained
interest must be at least 10 percent of
the outstanding balance of the loan
through the life of the loan. If the
originating lender is any other type of
eligible organization, the retained
interest must be at least 5 percent of the
outstanding balance of the loan through
the life of the loan, unless a higher
percentage is required under state law;
(iii) The location and custodian for
original loan documents;
(iv) An explanation of the conditions
under which parties to the agreement
can gain access to financial and other
performance information about a loan,
the borrower, and the servicer so the
parties can monitor the loan;
(v) An explanation of the duties and
responsibilities of the originating
lender, servicer, and participants with
respect to all aspects of the
participation, including servicing,
default, foreclosure, collection, and
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other matters involving the ongoing
administration of the loan; and
(vi) Circumstances and conditions
under which participants may replace
the servicer.
■ 3. Amend § 701.23 by adding
introductory text to read as follows:
DEPARTMENT OF TRANSPORTATION
§ 701.23 Purchase, sale, and pledge of
eligible obligations.
Special Conditions: Cessna Aircraft
Company, Model J182T; Electronic
Engine Control System Installation
This section governs a federal credit
union’s purchase, sale, or pledge of all
or part of a loan to one of its own
members, subject to a limited exception
for certain well capitalized federal
credit unions, where no continuing
contractual obligation between the seller
and purchaser is contemplated. For
purchases of eligible obligations, except
as described in paragraph (b)(2) of this
section, the borrower must be a member
of the purchasing federal credit union
before the purchase is made. A federal
credit union may not purchase a nonmember loan to hold in its portfolio.
*
*
*
*
*
PART 741—REQUIREMENTS FOR
INSURANCE
4. The authority citation for part 741
continues to read as follows:
■
Authority: 12 U.S.C. 1757, 1766(a), 1781–
1790, and 1790d; 31 U.S.C. 3717.
Subpart A—Regulations Applicable to
Both Federal Credit Unions and
Federally Insured, State-Chartered
Credit Unions That Are Not Codified
Elsewhere in NCUA’s Regulations
5. Amend § 741.8 by:
a. Removing the word ‘‘or’’ appearing
at the end of paragraph (b)(2);
■ b. Adding the word ‘‘or’’ after the
semicolon appearing at the end of
paragraph (b)(3); and
■ c. Adding paragraph (b)(4).
The addition reads as follows:
■
■
§ 741.8 Purchase of assets and
assumption of liabilities.
*
*
*
*
*
(b) * * *
(4) Purchases of loan participations as
defined in and meeting the
requirements of § 701.22 of this chapter.
*
*
*
*
*
■ 6. Add § 741.225 to read as follows:
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§ 741.225
Loan participations.
Any credit union that is insured
pursuant to Title II of the Act must
adhere to the requirements stated in
§ 701.22 of this chapter, except that
federally insured, state-chartered credit
unions are exempt from the requirement
in § 701.22(b)(4).
[FR Doc. 2013–15178 Filed 6–24–13; 8:45 am]
BILLING CODE 7535–01–P
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Federal Aviation Administration
14 CFR Part 23
[Docket No. FAA–2013–0493; Special
Conditions No. 23–260–SC]
Federal Aviation
Administration (FAA), DOT.
ACTION: Final special conditions; request
for comments.
AGENCY:
These special conditions are
issued for the Cessna Aircraft Company
(Cessna) Model J182T airplane. This
airplane will have a novel or unusual
design feature(s) associated with the
installation of an electronic engine
control. The applicable airworthiness
regulations do not contain adequate or
appropriate safety standards for this
design feature. These special conditions
contain the additional safety standards
that the Administrator considers
necessary to establish a level of safety
equivalent to that established by the
existing airworthiness standards.
DATES: The effective date of these
special conditions is June 25, 2013.
We must receive your comments by
July 25, 2013.
ADDRESSES: Send comments identified
by docket number [FAA–2013–0493]
using any of the following methods:
D Federal eRegulations Portal: Go to
https://www.regulations.gov and follow
the online instructions for sending your
comments electronically.
D Mail: Send comments to Docket
Operations, M–30, U.S. Department of
Transportation (DOT), 1200 New Jersey
Avenue SE., Room W12–140, West
Building Ground Floor, Washington, DC
20590–0001.
D Hand Delivery of Courier: Take
comments to Docket Operations in
Room W12–140 of the West Building
Ground Floor at 1200 New Jersey
Avenue SE., Washington, DC, between 9
a.m. and 5 p.m., Monday through
Friday, except Federal holidays.
D Fax: Fax comments to Docket
Operations at 202–493–2251.
Privacy: The FAA will post all
comments it receives, without change,
to https://www.regulations.gov, including
any personal information the
commenter provides. Using the search
function of the docket Web site, anyone
can find and read the electronic form of
all comments received into any FAA
docket, including the name of the
individual sending the comment (or
signing the comment for an association,
SUMMARY:
PO 00000
Frm 00032
Fmt 4700
Sfmt 4700
business, labor union, etc.). DOT’s
complete Privacy Act Statement can be
found in the Federal Register published
on April 11, 2000 (65 FR 19477–19478),
as well as at https://DocketsInfo.dot.gov.
Docket: Background documents or
comments received may be read at
https://www.regulations.gov at any time.
Follow the online instructions for
accessing the docket or go to the Docket
Operations in Room W12–140 of the
West Building Ground Floor at 1200
New Jersey Avenue SE., Washington,
DC, between 9 a.m. and 5 p.m., Monday
through Friday, except Federal holidays.
FOR FURTHER INFORMATION CONTACT: Mr.
Peter Rouse, Federal Aviation
Administration, Small Airplane
Directorate, Aircraft Certification
Service, 901 Locust, Room 301, Kansas
City, MO 64106; telephone (816) 329–
4135; facsimile (816) 329–4090.
SUPPLEMENTARY INFORMATION: The FAA
has determined that notice and
opportunity for prior public comment
hereon are impracticable because these
procedures would significantly delay
issuance of the design approval and
thus delivery of the affected aircraft. In
addition, the substance of these special
conditions has been subject to the
public comment process in several prior
instances with no substantive comments
received. The FAA therefore finds that
good cause exists for making these
special conditions effective upon
issuance.
Comments Invited
We invite interested people to take
part in this rulemaking by sending
written comments, data, or views. The
most helpful comments reference a
specific portion of the special
conditions, explain the reason for any
recommended change, and include
supporting data. We ask that you send
us two copies of written comments.
We will consider all comments we
receive on or before the closing date for
comments. We will consider comments
filed late if it is possible to do so
without incurring expense or delay. We
may change these special conditions
based on the comments we receive.
Background
On April 2, 2012, Cessna Aircraft
Company applied for an amendment to
Type Certificate No. 3A13 to include the
new model J182T which will
incorporate the installation of the
Societe de Motorisation Aeronautiques
(SMA) Engines, Inc. SR305–230E–C1
which is a four-stroke, air cooled, diesel
cycle engine that uses turbine (jet) fuel.
The J182T incorporates an engine
controlled by an electronic engine
E:\FR\FM\25JNR1.SGM
25JNR1
]]>Agencies
[Federal Register Volume 78, Number 122 (Tuesday, June 25, 2013)]
[Rules and Regulations]
[Pages 37946-37958]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-15178]
-----------------------------------------------------------------------
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701 and 741
RIN 3133-AEOO
Loan Participations; Purchase, Sale and Pledge of Eligible
Obligations; Purchase of Assets and Assumption of Liabilities
AGENCY: National Credit Union Administration (NCUA).
[[Page 37947]]
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: NCUA amends its loan participation rule, eligible obligations
rule, and requirements for insurance rule to clarify how the loan
participation rule is to be applied and how it relates to other rules.
The amendments reorganize the loan participation rule and focus on the
purchase side of loan participation transactions. The amendments make
it easier to understand NCUA's regulatory requirements for loan
participations. The amendments also expand loan participation
requirements to federally insured, state-chartered credit unions
(FISCUs).
DATES: This rule is effective July 25, 2013.
FOR FURTHER INFORMATION CONTACT: Pamela Yu, Staff Attorney, Office of
General Counsel at (703) 518-6540; or Matthew J. Biliouris, Director of
Supervision, Office of Examination and Insurance at (703) 518-6360.
SUPPLEMENTARY INFORMATION
I. Background
II. Summary of Public Comments
III. Section-by-Section Analysis of the Final Rule
IV. Regulatory Procedures
I. Background
A. Why is NCUA adopting this rule?
Loan participations strengthen the credit union industry by
providing a useful way for credit unions to diversify their loan
portfolios, improve earnings, generate loan growth, manage their
balance sheets, and comply with regulatory requirements. Credit unions
also use liquidity obtained through the sale of loan participations to
increase the availability of credit to small businesses and consumers.
Nevertheless, the NCUA Board (Board) believes that loan
participations also pose an inherent risk to the National Credit Union
Share Insurance Fund (NCUSIF) due to the interconnectedness between
participants. For example, large volumes of participated loans may be
tied to a single originator, borrower, or industry or they may be
serviced by a single entity. If any one of those entities experiences a
financial or other problem, the effects of such concentration could
impact multiple credit unions. Additionally, because both federal
credit unions (FCUs) and federally insured, state-chartered credit
unions (FISCUs) actively engage in loan participations, there is
potential risk to the NCUSIF. Accordingly, it is important to the
safety and soundness of the NCUSIF that all federally insured credit
unions (FICUs) adhere to appropriate standards when transacting loan
participations.
Finally, it has come to NCUA's attention during examinations and
other supervisory contacts with FICUs that many credit union officials
find the loan participation rule unclear as to whom it applies, and
what transactions it covers. This rule is intended to address this
concern. For these reasons, the Board is issuing this final rule to
amend Sec. Sec. 701.22, 701.23, and 741.8.
B. What changes were included in the proposed rule?
In December 2011, the Board issued a proposed rule to amend the
loan participation rule.\1\ The proposal reorganized the rule to make
it easier to read and understand. It also changed the rule's focus to
address the requirements for a credit union purchasing a loan
participation. In addition, to ensure that loan participation
transactions are conducted in a safe and sound manner, the proposed
rule prescribed certain concentration limits on credit unions and
encouraged credit unions to establish others of their own. It also
required that a loan participation agreement include specific
provisions to assist a purchasing credit union in conducting its due
diligence. The Board proposed these changes to better detail NCUA's
regulatory expectations regarding key aspects of a loan participation
purchase, including: (1) The credit union's loan participation policy;
(2) the loan participation agreement; and (3) ongoing monitoring of the
loan participation.
---------------------------------------------------------------------------
\1\ 76 FR 79548 (Dec. 22, 2011).
---------------------------------------------------------------------------
II. Summary of Public Comments
The public comment period for the proposed rule ended on February
21, 2012. NCUA received 215 comments on the proposed rule: 48 from
FCUs; 53 from state-chartered credit unions; 5 from trade associations
(1 representing community development credit unions; 2 representing
credit unions; 1 representing state credit union supervisors; and 1
representing credit union service organizations (CUSOs)); 23 from state
credit union leagues; 11 from CUSOs or third party vendors; 73 from
individuals or credit union volunteers (including 67 identical
letters); and 1 from a law firm.
A majority of the comments on the proposal expressed opposition to,
or raised concerns about, one or more aspects of the proposal. A number
of commenters, however, supported at least one specific aspect of the
proposal or expressed general support for its overall intent and key
principles.
A. What were the general comments supporting the proposed rule?
A significant number of commenters supported applying the loan
participation rule's provisions to FISCUs. These commenters maintained
that the data quoted in the proposed rule's preamble demonstrates that
applying the rule to FISCUs is appropriate. Some commenters also
suggested that subjecting FCUs and FISCUs to the same requirements
would promote the loan participation market and increase participation
activity.
Commenters expressed general support for the loan originator
retention requirement of 10 percent of the loan amount as required by
the Federal Credit Union Act (FCU Act) for FCUs, and the single
borrower concentration limit of 15 percent of a credit union's net
worth.
Additionally, some commenters supported the proposed provision
requiring a credit union to use underwriting standards for purchasing
loan participations similar to those the credit union uses when it
originates a loan. As discussed below, however, the majority of
commenters opposed this provision.
B. What were the general comments opposing the proposed rule?
There were two proposed provisions that generated the greatest
degree of concern for the majority of commenters. They were: (1) The
single originator concentration limit of 25 percent of net worth; and
(2) the requirement that a FICU establish underwriting standards for
loan participations which, at a minimum, meet the same underwriting
standards the FICU uses when it originates its own loan.
More generally, commenters suggested that the proposal would
significantly limit a FICU's ability to sell and purchase loan
participations, while providing only limited safety and soundness
benefits. They argued that the rule should allow greater flexibility,
particularly because of the importance of loan participations in
helping credit unions to diversify their portfolios, improve earnings,
manage and generate liquidity, manage asset growth, maintain an
adequate capital ratio, diversify lending risk, and address loan
concentration issues.
Commenters also expressed concern that the rule would impose undue
regulatory burdens on credit unions, with a disproportionately adverse
impact on smaller credit unions. They asserted that the proposal was
[[Page 37948]]
misguided in prescribing a one-size-fits-all approach, without
considering the asset size, level of experience, or risk profile of
each individual credit union. Instead, commenters suggested that the
rule should focus on identified problem areas or on participations
where the risk profile for the underlying loans is higher, such as
participations in member business loans (MBLs) and commercial real
estate loans.
In addition, commenters maintained that loan participations do not
represent a systemic risk to the NCUSIF and suggested the proposal may
actually increase the overall risk to the NCUSIF. Commenters argued
that limiting the ability of credit unions to mitigate risk through
diversification could increase, rather than reduce, risk exposures.
Several commenters also expressed concern that the proposal would
undermine the dual chartering system. These commenters suggested that
state law and regulation should continue to govern loan participations
for FISCUs.
NCUA has carefully reviewed and considered all the comments it
received in response to the proposal. Acknowledging the substantial
concerns raised by commenters, the Board has made adjustments to the
final rule. Most notably, the final rule establishes a higher, more
flexible single originator concentration limit. It also permits a FICU
to purchase a participation in a loan even if it does not originate
that kind of loan. A section-by-section analysis of the final rule and
a discussion of the pertinent public comments follows.
III. Section-by-Section Analysis of the Final Rule
A. Sec. 701.22--Introductory Text
The introductory text clarifies the scope of the rule and helps
distinguish a loan participation under Sec. 701.22 from an eligible
obligation under Sec. 701.23. Further, it clarifies that the rule
applies to a natural person FICU's purchase of a loan participation
where the borrower is not a member of that credit union. Generally, an
FCU's purchase, in whole or in part, of its member's loan is covered by
NCUA's eligible obligations rule at Sec. 701.23.\2\ Additionally, by a
cross-reference to Part 741 of NCUA's regulations, the rule also is
made applicable to natural person FISCUs. The Board notes that
corporate credit unions are subject to the loan participation
requirements set forth in Part 704 and, therefore, are not subject to
Sec. 701.22 of NCUA's regulations.
---------------------------------------------------------------------------
\2\ Note, however, a limited exception for certain well
capitalized federal credit unions to purchase, subject to certain
conditions, non-member eligible obligations from a FICU. 12 CFR
701.23(b)(2).
---------------------------------------------------------------------------
Some commenters expressed continued confusion regarding the scope
of Sec. 701.22 and Sec. 701.23 of NCUA's regulations. The final rule
clarifies the interplay between Sec. 701.22 and Sec. 701.23, but the
Board acknowledges these regulations are complex so additional
modifications have been made to further clarify the introductory text
to the final rule.
B. Sec. 701.22(a)--Definitions
The final rule revises the definitions for ``originating lender''
and ``participation loan'' to clarify that the originating lender must
participate in the loan throughout the life of the loan. It also adds a
new definition of ``associated borrower.'' The definitions of ``credit
union,'' ``credit union organization,'' ``eligible organization,'' and
``financial organization'' were not part of the proposed amendments and
are generally unmodified from the existing rule. For consistency with
the formatting conventions recommended by the Federal Register,
however, the final rule amends the paragraph's format by listing all
definitions alphabetically and removing the numeric designations. A
brief discussion of each definition, and the public comments pertinent
to each, follows.
1. Associated Borrower
The proposed rule added a new definition of the term ``associated
borrower.'' Some commenters stated that the proposed definition is too
broad. They also expressed concerns that the definition is inconsistent
with the MBL rule's definition of ``associated member.'' \3\ The Board
notes the ``associated borrower'' definition is more specific than, but
not an expansion of, the definition of ``associated member'' under Part
723. The definition tracks closely with the MBL rule, but it more
clearly defines the types of relationships considered to be an
associated relationship by providing examples of the types of parties
who qualify as an associated borrower. Each of the defined
relationships under Sec. 701.22(a) is also captured under the broader
language in Sec. 723.21. In addition, use of the word ``borrower''
instead of ``member'' is intentional, as not all participation loans
would be made to a member of the purchasing credit union. As such, the
Board believes the definition of ``associated borrower'' is
appropriate.
---------------------------------------------------------------------------
\3\ 12 CFR 723.21.
---------------------------------------------------------------------------
2. Credit Union Organization
The loan participation rule defines ``credit union organization''
as ``any credit union service organization meeting the requirements of
part 712 of this chapter,'' but excludes ``trade associations or
membership organizations principally composed of credit unions.''
While this definition was not included in any proposed amendments,
several commenters suggested the definition of ``credit union
organization'' could be interpreted to exclude FISCUs' CUSOs because
NCUA's CUSO rule (Part 712) does not apply in full to CUSOs formed by
state-chartered credit unions. The Board clarifies that the definition
includes CUSOs subject to any requirement under Part 712, including
CUSOs invested in or loaned to by FISCUs.
3. Eligible Organization
Under the current rule, the term ``eligible organization'' means
``a credit union, credit union organization, or financial
organization.'' The definition of ``eligible organization'' was not
part of the proposed amendments, but several commenters contended that
the current definition of ``eligible organization'' is too limited.
They argued that the definition should be expanded to include
additional types of organizations to allow investors outside the credit
union industry to participate in loans. The Board believes the current
definition is sufficiently broad because, through the term ``financial
organization,'' it includes any federally chartered or federally
insured financial institution and a host of state and federal
government sponsored and originated programs.
In a 2003 rulemaking \4\ that expanded the definition of
``financial organization'' to include state and federal government
agencies, the Board noted that the rule derives its definition from the
legislative history of the 1977 public law that granted FCUs various
authorities, including the authority to engage in loan
participations.\5\ In granting this authority, Congress expressed its
intent to enhance the ability of FCUs to serve their members' loan
demands. Congress also expressed, however, that originating FCUs must
maintain discipline in the origination process. In accordance with the
FCU Act and the legislative history, the Board believes the loan
participation authority must not be so broad that loan
[[Page 37949]]
participations may be originated from any source. As such, the Board
believes the current definition of eligible organization already
includes all appropriate entities. Further, as discussed below, at a
minimum, the seller in a loan participation agreement must be an
eligible organization. The purchasing participants, however, may, but
are not required to, be eligible organizations.
---------------------------------------------------------------------------
\4\ 68 FR 39866, 39867 (July 3, 2003); see also 68 FR 75110
(Dec. 30, 2003).
\5\ H.R. Rep. No. 95-23, at 12 (1977), reprinted in 1977
U.S.C.C.A.N. 115.
---------------------------------------------------------------------------
4. Financial Organization
While the definition of ``financial organization'' was not part of
the proposed amendments, several commenters contended the definition
should be revised to include non-federally insured or non-federally
chartered financial institutions, such as privately insured, state-
chartered credit unions (PISCUs). The Board notes the rule's current
definition of ``eligible organization'' already includes non-federally
insured or non-federally chartered credit unions. Through the term
``credit union,'' an eligible organization includes any federal or
state chartered credit union, including those that are privately
insured.
5. Loan Participation
The proposed rule revised the definition of ``loan participation''
to clarify that the originating lender must participate in the loan
throughout the life of the loan.
During the public comment period for the proposal, a question was
raised with respect to the stipulation in the definition that ``one or
more eligible organizations participate'' in the loan. This commenter
suggested that this language is ambiguous with respect to whether one
or all participants must be an eligible organization. As noted above,
at a minimum, the originating lender in a loan participation agreement
must be an eligible organization. Purchasing participants are not
required to be eligible organizations.
In addition, commenters raised concerns that the proposed
definition's requirement for ``the originating lender's continuing
participation throughout the life of the loan'' would prohibit a FICU
from purchasing a loan participation and then selling participation
interests in its participated portion of that loan. These comments are
addressed in the next section.
6. Originating Lender
The proposed rule amended the definition of ``originating lender''
to clarify the requirement that a FICU may purchase a participation in
a loan only from the participant with which the borrower initially or
originally contracts for a loan.
Some commenters suggested the term ``originating lender'' should be
changed to ``lead lender'' and the definition revised to allow the
purchases of loan participation interests from a lender that did not
initially originate the loan. In addition, several commenters expressed
concern that the proposed definition of ``originating lender,'' read
together with the proposed ``loan participation'' definition, would
prohibit the resale of participation interests. These commenters
suggested that the rule should permit the resale of participation
interests and/or that a credit union should be permitted to buy an
eligible obligation or whole loan from a CUSO or another credit union
and then sell participations in that loan.
The Board notes that the current rule allows for the purchase of a
loan participation interest only from the lender that initially
originated the loan. A participation agreement must be made ``with the
originating lender,'' that is, the ``participant with which the member
contracts.'' \6\ In other words, under the current rule, only the
lender that initially originates a loan may sell participations in that
loan to other lenders. The current rule does not permit the resale of a
participation interest or the purchase of a participation interest in
an eligible obligation. The proposed amendments were intended to retain
and clarify this existing requirement. In a resale, a credit union
cannot participate its interest in a loan because it is not the
originating lender. Similarly, a credit union that purchases a loan as
an eligible obligation from a CUSO or another credit union cannot
participate that loan to others because the credit union is not the
originating lender. The requirement that credit unions only participate
with the originating lender derives from the FCU Act's requirement for
originating FCUs to retain at least a 10 percent interest in the face
amount of all loans they participate out.\7\ Moreover, the Board
interprets the authority in the FCU Act for credit unions to
participate in loans ``with'' other lenders to contemplate a shared,
continuing lending arrangement.\8\ Simply put, the rule requires an
originating lender to remain part of the participation arrangement and
to retain a continuing interest in the loan in order to be a true
participant. Otherwise, the transaction is not a loan participation but
more akin to the sale of an eligible obligation. As the Board noted in
1991, permitting the sale of participation interests in eligible
obligations ``will blur the distinction between loan participations and
loan purchases and sales,'' arguably circumventing the purpose of the
loan participation and eligible obligations rules.\9\ Additionally, the
Board believes the continued participation of the lender that initially
originated the loan is integral to a safe and sound participation
arrangement. In 1991, the Board expressed its concern that a lender
``may have a decreased interest in properly underwriting a loan if they
know they can later reduce their risk by selling participation
interests in it.'' \10\ The requirement for the originating lender's
continued participation in a loan participation arrangement is intended
to address this safety and soundness concern. Accordingly, the
definition of ``originating lender'' is adopted substantively as
proposed in the final rule.
---------------------------------------------------------------------------
\6\ 12 CFR 701.22(a).
\7\ 12 U.S.C. 1757(5)(E).
\8\ 12 U.S.C. 1757(5).
\9\ 56 FR 15036 (Apr. 15, 1991).
\10\ Id.
---------------------------------------------------------------------------
The Board, however, notes FICUs experiencing liquidity needs have
several options for liquidating their participation interests in a
manner consistent with the final rule. For example, an FICU may sell
its participation interest back to the originating lender or it may
sell its interest to another lender within the same participation
arrangement. Subject to the requirements in Sec. 701.23, a FICU may
also sell its interest as an eligible obligation. A FICU may also enter
into an assumption agreement whereby another lender would agree to
assume, in whole, the FICU's participation interest in a loan.\11\
---------------------------------------------------------------------------
\11\ An assumption, in whole, of a participation interest is
distinguishable from the resale of a participation interest (i.e., a
participation of a participated interest) because another lender
would fully assume the obligation of a participant in a
participation agreement with the originating lender.
---------------------------------------------------------------------------
Additionally, several commenters suggested the word ``member'' in
the definition of originating lender be replaced with ``borrower'' for
consistency with the introductory language to Sec. 701.22. The Board
agrees, and the final definition has been modified accordingly.
Commenters also expressed concern about the definition of
``originating lender'' and its application to CUSOs. These commenters
observed that a CUSO often serves as an originator in name only and,
thus, is not the most appropriate party to regard as the originating
lender for the purposes of the rule. For example, loans may be
underwritten and processed by a CUSO,
[[Page 37950]]
but funded by its owner credit union. The Board acknowledges that this
CUSO model is not uncommon within the industry and permissible under
Sec. 712.5. For purposes of this final rule, it is the Board's intent
that the originating lender is the entity with which the borrower
initially or originally contracts for the loan.
C. Sec. 701.22(b)--Requirements for Loan Participation Purchases
The final rule reorganizes and revises the provisions of Sec. Sec.
701.22(b), (c), and (d) of the current rule and consolidates them into
revised Sec. 701.22(b). The revised section also includes additional
details to improve clarity and address safety and soundness concerns.
Specifically, revised Sec. 701.22(b) provides that a FICU may only
purchase a loan participation if the seller is an eligible organization
and if the loan is one the FICU is empowered to grant under applicable
law and its own internal loan policies. Empowered to grant refers to a
FICU's authority to make a loan under the FCU Act, applicable state
law, NCUA regulations, and its own bylaws and internal policies.\12\
Other requirements for purchasing a loan participation include adopting
a written loan participation agreement, establishing the borrower's
membership in the originating FICU or one of the participating FICUs by
the time the loan participation is purchased, and having/evidencing a
continuing participation interest by the originating lender for the
loan's duration. As further discussed below, such continuing interest
by the originating lender must be at least 5 percent of the outstanding
balance of the loan through the life of the loan. As mandated by the
FCU Act, however, originating FCUs must retain at least 10 percent.\13\
---------------------------------------------------------------------------
\12\ See OGC Op. 04-0713 (Oct. 25, 2004).
\13\ 12 U.S.C. 1757(5)(E).
---------------------------------------------------------------------------
The final rule requires a FICU to adopt a written loan
participation policy, and it requires the policy to include certain
provisions. Specifically, a FICU's loan participation policy must
address various concentration limits and the maximum limit a FICU
intends to place on its outstanding loan participations. The Board
emphasizes that there may be other factors a FICU should consider in
formulating a loan participation policy based on its size, complexity,
and lending experience. The Board expects a FICU to consider all of
these factors in establishing its policy. For example, a FICU
purchasing a loan participation pool might perform statistical sampling
in evaluating the underwriting standards of the pool. Conversely, a
large purchase representing a significant portion of the FICU's net
worth should require a full review of the loan documentation before
approval. The Board expects a FICU to establish the parameters for
review, including a periodic review for appropriateness, and adhere to
such parameters.
1. Underwriting Standards--Sec. 701.22(b)(5)(i)
Section 701.22(b)(5)(i) of the proposal required a FICU to
establish underwriting standards for loan participations meeting at
least the same underwriting standards the FICU uses when it originates
its own loan. Consistent with this, the proposal also eliminated an
exception in Sec. 701.22(c)(4) of the current rule, which permits an
FCU to purchase a loan participation that was originated with
underwriting standards different than its own.
While several commenters supported this proposed provision, a
majority expressed concern that this aspect would effectively limit a
credit union's loan participation purchases to those involving the
types of loans that the purchasing credit union originates. Commenters
suggested this could significantly inhibit loan participation programs.
Commenters argued this would undermine safety and soundness by limiting
diversification of credit unions' loan portfolios. They also stated
this would limit the pool of credit unions to which originating credit
unions could sell participation interests.
After careful consideration of these comments, the Board has
determined to modify the rule to permit a purchasing credit union to
participate in types of loans it does not originate. The Board
recognizes that one of the principal benefits of loan participation is
greater loan portfolio diversification. Accordingly, the final rule
permits a FICU to purchase a participation in a loan it is empowered to
grant, even if it does not originate that type of loan or if the loan
is underwritten using standards other than those it uses when
originating loans. It does not prevent a FICU from establishing
different, or, where appropriate, even less stringent, underwriting
standards for loan participations than it uses when originating its own
loans. Moreover, where a FICU both originates and purchases
participations in the same types of loans, the FICU is permitted to
establish different underwriting standards for originating such loans
and for purchasing participations in those loans. For example, if a
FICU is empowered to grant MBLs, it may establish in its loan policy
two distinct sets of underwriting standards, one for purchasing
participations in MBLs and one for originating MBLs.
The Board emphasizes, however, that a FICU must establish prudent
underwriting standards for loan participations and conduct appropriate
due diligence before purchasing a loan participation. Such due
diligence should be independently conducted by the purchasing FICU or
outsourced to a qualified third party that is not otherwise affiliated
with the loan. A purchasing FICU may not rely on an originating
lender's due diligence.
2. Concentration Limits on Loan Participations
As discussed in the preamble to the proposal, in establishing
concentration limits on loan participations, the Board sought to
mitigate risk to the NCUSIF without discouraging continued growth.\14\
By instituting concentration limits for loan participations that are
tied to net worth, the proposal aimed to strike this balance by tying
the concentration limits to net worth. The proposal also recognized the
need for FICUs to identify and manage concentration risk on their
balance sheets. Key among these risks are concentrations related to
purchasing from a single or too few originators, loans to one or too
few borrowers or a group of associated borrowers, and too many loans of
a particular type.
---------------------------------------------------------------------------
\14\ 76 FR 79548, 79549 (Dec. 22, 2011).
---------------------------------------------------------------------------
The Board proposed to limit a FICU's loan participation purchases
from any one originator to a maximum of 25 percent of the FICU's net
worth, with no provision for waiver. The Board also proposed to limit a
FICU's loan participation purchases involving any one borrower or group
of associated borrowers to 15 percent of the FICU's net worth, unless
the appropriate regional director grants a waiver. The Board requested
public comment on the appropriateness of these caps, how they should be
structured, and any alternative approaches to them.
a. Single Originator Concentration Limit
A majority of commenters opposed the proposed 25 percent net worth
limitation on loan participation purchases from any one originator.
Some commenters supported the reason for this limitation, but most
indicated that a 25 percent cap is too low. Commenters stated that the
proposed 25 percent limit would be cumbersome to manage and immaterial
to overall risk mitigation. They also argued that the limit could
actually increase, rather
[[Page 37951]]
than decrease, risk exposures, as credit unions would be required to
manage and monitor multiple originators.
Some commenters disagreed that purchasing participations from one
originator will necessarily increase risks. These commenters argued
that it is more prudent to focus on diversification of risk in a
participation portfolio than to limit purchases from a single
originator. Other commenters observed that the quality of the
underlying loans determines the level of potential risk more than the
originating lender. Commenters also raised concerns that the proposed
limit failed to consider the differences in the types of loans being
participated. For example, large pools of auto loans represent multiple
streams of repayment, whereas an equal dollar amount of mortgage or
commercial loans may rely on a far less diverse stream of repayment.
These commenters contended it is unreasonable for the proposal to limit
all of a FICU's participation purchases from any one originator, which
are spread out over many loans and borrowers, to 25 percent of net
worth, when under the MBL rule, a FICU could make one loan to one
borrower in the amount of up to15 percent of net worth.\15\
---------------------------------------------------------------------------
\15\ 12 CFR 723.8.
---------------------------------------------------------------------------
Several commenters also stated that there is no similar
concentration limit in banking regulations. These commenters believed
that the proposed limitation would arbitrarily disadvantage credit
union loan participation programs in comparison to banks.
Commenters also expressed concern that the requirement would
disrupt established, effective relationships with originators. Many
noted that a purchasing credit union may have years of experience
dealing with only one or a few originators. These credit unions would
be forced to seek out new relationships. Commenters indicated that it
takes a significant amount of time and resources to establish strong
relationships with originators and the proposal would mitigate the
value of those existing relationships. In addition, commenters argued
that the proposed limitation would have a disproportionately negative
impact on smaller credit unions by increasing due diligence costs.
Also, many smaller credit unions may not have the capacity or expertise
to monitor multiple originators.
Similarly, several commenters suggested that the proposal would
have a disproportionately negative impact on certain originators. For
example, there are only a limited number of originators of taxi
medallion loans. Moreover, commenters stated that originators on the
whole would be negatively impacted because the proposed restriction
would limit the pool of available participant purchasers.
Commenters also raised concerns that the proposed limitation would
impact a particular CUSO model. Under this model, in order to aggregate
resources for lending expertise, credit unions form a CUSO to originate
mortgage or business loans in either the CUSO's name or in an owner
credit union's name. The originating lender then sells loan
participation interests to the CUSO's other owner credit unions.
Commenters indicated that, if the proposed 25 percent single originator
limit were adopted, many credit unions involved in these types of CUSOs
would be immediately out of compliance with the new rule due to the
interconnectedness that is inherent in this business model.
The Board is sensitive to these concerns. As noted above, in
prescribing concentration limits on loan participations, the Board
seeks to strike an appropriate balance between mitigating risk and
fostering the industry's growth and stability. Upon consideration of
commenters' feedback, the Board believes that a higher, more flexible
cap for loan participations involving a single originator is
appropriate.
Some commenters suggested the cap should be removed entirely, or
that certain exemptions from the single originator limitation should be
provided. Most commenters, however, favored keeping the single
originator cap, but advocated a higher limit. A number of commenters
suggested that a higher concentration limit should be permitted for
loans originated by CAMEL 1 or 2 FICUs. One commenter argued that the
limit should be 400 percent of net worth. Another commenter suggested
that the limit be 100 percent of capital. Commenters also suggested
that if the loan-to-value ratio of the underlying loans is under 75
percent, a higher limit should be permitted. A significant number of
commenters also requested that the rule permit waivers from the single
originator concentration limit.
Based on the comments, the Board has determined to substantially
raise the single originator cap. The final rule includes a single
originator cap not to exceed the greater of $5 million or 100 percent
of net worth. The Board continues to believe that net worth is the
appropriate measure for this cap. Net worth cushions fluctuations in
earnings, supports growth, and provides protection against insolvency.
As the reserve of funds available to absorb losses, it is the best
measure to gauge a credit union's risk exposure. The Board believes a
limit of 100 percent of net worth provides sufficient concentration
risk mitigation, yet is not too restrictive as to adversely impact a
significant number of credit unions.
NCUA does not currently collect the amount of loan participations
purchased from a particular originator on the quarterly 5300 Call
Report. Using reasonable assumptions, however, the agency is able to
gauge some of the impact this limit may have on the industry. For
example, assuming all loan participations were purchased from one
originator, only 79 of the 1,316 FICUs reporting purchased loan
participations outstanding were over the 100 percent net worth limit as
of December 31, 2012. In fact, this is a conservative analysis and
likely overstates the number of FICUs over the aggregate limit, as many
credit unions purchase participations from multiple originators.
Therefore, the following table illustrates the difference in the number
of affected credit unions, depending on the number of originators \16\
and the single originator limit in effect:
---------------------------------------------------------------------------
\16\ Assuming an equal amount of loan participations would be
purchased from each originator.
[[Page 37952]]
------------------------------------------------------------------------
Number of
Number of Number of FICUs
FICUs FICUs exceeding the
exceeding the exceeding the single
single single originator
Number of originators originator originator limit of the
limit of 25 limit of 100 greater of $5
percent of net percent of net million or 100
worth worth percent of net
worth
------------------------------------------------------------------------
1....................... 483 79 39
2....................... 251 17 5
3....................... 144 9 1
4....................... 79 7 0
------------------------------------------------------------------------
In light of these considerations, the Board believes the 100
percent of net worth concentration limit in the final rule addresses
commenters' major concerns regarding the single originator
concentration limit.
The Board also recognizes that a flat percentage threshold, even if
significantly raised, may not address commenters' concerns that the
proposed concentration limit would unfairly disadvantage smaller credit
unions. The final rule also includes a dollar threshold of $5 million
to address these specific concerns. The dollar limit was added to
reduce the potential adverse impact on small credit unions with lower
net worth in terms of dollar amount. Indeed, as illustrated in the
table above, when the threshold of ``the greater of $5 million or 100
percent of net worth'' was applied, the number of credit unions
exceeding the limit fell from 79 to 39. Of these 39 credit unions, only
8 exceeded the limit based on the $5 million threshold, which was
higher than their total net worth. The Board notes the $5 million limit
poses a relatively small risk to the NCUSIF and generally correlates
with NCUA's recently amended definition of small entity for purposes of
the Regulatory Flexibility Act.\17\ For example, with aggregate
industry net worth at over 10 percent, a $50 million credit union would
have approximately $5 million in net worth.\18\ As total assets and net
worth increase, however, the percentage of net worth threshold would
become the prevailing limit.
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\17\ 78 FR 4032 (Jan. 18, 2013).
\18\ The non-dollar weighted average net worth ratio for FICUs
under $50 million was 14.30% as of December 31, 2012, while the
aggregate net worth ratio for the under $50 million group was
12.44%.
---------------------------------------------------------------------------
Additionally, the final rule allows a FICU to apply for a waiver
from the single originator concentration limit. Waivers are discussed
in more detail below. The Board believes that with these substantial
adjustments, the final rule achieves the agency's key objective of
mitigating risk to the NCUSIF while providing FICUs with sufficient
flexibility to meet their operational needs.
Several commenters requested clarification on whether a credit
union that purchases loan participation interests from both a CUSO and
the CUSO's owner credit union has purchased from one or two
originators. The Board notes that a CUSO is an individual business that
is a distinct and separate entity from any credit union that lends to
it or invests in it. NCUA's CUSO regulation requires that a CUSO and a
credit union that owns all or part of it must be operated in a manner
that demonstrates to the public the separate corporate existence of
each entity.\19\ For example, each separate entity must operate so that
``its respective business transactions, accounts, and records are not
intermingled.''\20\ As such, purchases of participation interests in
loans originated by a CUSO will not be aggregated with participation
interests in loans originated by the CUSO's owner credit union for
purposes of the single originator limit. They will be treated as two
separate originators. The Board emphasizes, however, that CUSO
arrangements must not be used to circumvent the requirements of the
final rule. For example, FICUs may not circumvent the rule by
establishing ``round-robin'' participation arrangements in which
participants take turns as the originating lender in order to
effectively distribute the single originator concentration limit among
multiple parties.
---------------------------------------------------------------------------
\19\ 12 CFR 712.4.
\20\ 12 CFR 712.4(a)(1).
---------------------------------------------------------------------------
b. Single Borrower Concentration Limit
A number of commenters expressed support for the proposed 15
percent of net worth concentration limit on the purchase of
participations of loans made to any one borrower or group of borrowers.
Some commenters supported the reason for this limitation, but
maintained that each credit union should be permitted to establish its
own individual limit by internal policy. In general, however, most
commenters believed the 15 percent limit was reasonable, with many
noting its consistency with the loan to one borrower limit in the MBL
rule.
Other commenters disagreed with the proposed requirement, asserting
that the limitation is duplicative because the MBL rule already imposes
a similar limit. These commenters also argued that adequate
underwriting and due diligence are sufficient safeguards, thereby
obviating the need for a regulatory limitation.
The Board believes the 15 percent limitation appropriately balances
the need to mitigate borrower concentration risk with the need for
FICUs' flexibility in making credit decisions. As such, the limit is
adopted in the final rule as proposed. While this limit is similar to
the loan to one borrower limit in the MBL rule, they are not
duplicative because not all loan participations are business-related
loans subject to the MBL rule. The limit in this final rule applies to
both MBL and non-MBL participations. Further, including the limit in
the loan participation rule clarifies that MBL originations and MBL
participations are both subject to the 15 percent single borrower
limit. Thus, the Board believes that the limitation in the loan
participation rule is warranted. The provision allowing FICUs to apply
for waivers from this limit also is adopted in the final rule as
proposed.
c. Self-Imposed Concentration Limits
The proposal required a FICU's loan participation policy to
establish self-imposed limits on the amount of loan participations that
a FICU may purchase by loan type, not to exceed a specified percentage
of the credit union's net worth. Most commenters either supported, or
did not comment on, this aspect of the proposal.
As such, the provision is adopted as proposed. The Board reiterates
that it is important for a FICU to clearly identify and set reasonable
limits. Consistent with NCUA guidance on the evaluation of
concentration risk, concentration limits should be established
commensurate with a FICU's net worth.\21\
---------------------------------------------------------------------------
\21\ Letter to Credit Unions 10-CU-03, Concentration Risk (Mar.
2010).
---------------------------------------------------------------------------
d. Grandfathering
A FICU that exceeds the single originator or single borrower
concentration limits as of the effective date of this final rule will
be grandfathered and will not be required to divest of any loan
participations it holds at that time. The FICU will not be
[[Page 37953]]
permitted to purchase any additional participations after that time,
however, and its participation portfolio must decrease as
participations are paid off or sold until its portfolio complies with
regulatory concentration limits. A FICU may purchase additional
participations if its portfolio is below regulatory concentration
limits, but only in an amount up to the regulatory concentration
limits, not up to its previously grandfathered amount.
D. Sec. 701.22(c)--Waivers
In the proposed rule, the Board sought public comment on the
agency's waiver process. Commenters identified a number of general
concerns, including: (1) The perception that examiners discourage
credit unions from seeking a waiver; (2) delayed or slow responses from
NCUA regarding waiver applications; (3) lack of adequate explanations
for NCUA denials of waiver requests; and (4) poor examiner feedback
concerning waiver applications.
The Board finds the discussion on waivers helpful. Since the loan
participation rule was originally proposed in December 2011, NCUA has
taken, and continues to take, significant steps to improve and clarify
NCUA's overall waiver process. For example, NCUA's National Supervision
Policy Manual (NSPM) contains a chapter on waivers to enhance
consistency in waiver processing procedures and timeframes.
Additionally, NCUA recently issued a Supervisory Letter on evaluating
credit union requests for waivers of provisions in the MBL rule.\22\
---------------------------------------------------------------------------
\22\ Letter to Credit Unions 13-CU-02, Member Business Loan
Waivers (Feb. 22, 2013).
---------------------------------------------------------------------------
With respect to waiver requests to be made pursuant to this final
rule, FICUs are encouraged to contact NCUA examiners for guidance and
assistance prior to submitting a waiver application. A FICU's examiner
may offer guidance on how the regional office may evaluate a waiver
request because the regional office typically asks for the examiner's
input before making a final decision. The Board emphasizes that
regardless of the examiner's feedback, it remains a FICU's right to
request a waiver. Further, it remains the regional director's decision
to approve or disapprove a waiver request irrespective of any input the
examiner may have shared with a FICU. Regional offices will process
complete waiver applications as expeditiously as possible on a first-
in, first-out basis. The NSPM outlines specific timeframes for a
regional office to respond to a waiver request. The NSPM requires a
response within 45 days unless otherwise mandated by regulation. The
NSPM also contains standard templates for various types of waiver
response letters and provides guidance on the information that would
typically be addressed in the response, including specific reasons for
denying a waiver.\23\
---------------------------------------------------------------------------
\23\ See e.g., NSPM, Appendix 6-V.
---------------------------------------------------------------------------
Several commenters asserted that the authority to grant waivers for
FISCUs should reside with the state regulators, with notice to NCUA.
Alternatively, commenters suggested waivers for FISCUs should require
the concurrence of the state regulators. The Board continues to believe
that it is appropriate for NCUA, as administrator of the NCUSIF, to
approve or disapprove waiver requests but it agrees that waivers for
FISCUs should require the concurrence of the appropriate state
supervisory authority. The final rule has been revised accordingly.
Commenters also suggested that approvals should be deemed granted
if NCUA fails to act within a prescribed time period. The Board
believes waiver determinations must be rendered timely. Consistent with
the NSPM, the final rule provides that the regional director will
notify the FICU of the waiver decision within 45 calendar days of
receiving a fully completed waiver request. Waiver determinations are
appealable to the Board within 60 days.
Finally, a number of commenters suggested that if an originator
obtains a waiver for a loan, then a participating credit union should
not have to also obtain a waiver for that loan. Commenters also
suggested that waivers should be made available to FICUs in advance to
permit them to complete transactions consistent with pre-approved
guidelines, with subsequent notice to its regional office.
The Board agrees that if an originating lender obtains a waiver for
a loan, the participating credit unions do not also have to obtain a
waiver. If, however, the originating lender does not obtain a waiver
for a loan, each participant is required to obtain its own waiver for
its interest in the participated loan. In other words, a participating
credit union's waiver does not pass to other participants.
A waiver from the single originator limit is somewhat less time-
sensitive for a loan participation purchase than it is for granting an
MBL. For example, a waiver to exceed 100 percent of net worth to any
one originator does not affect purchases of loan participations from
originators that are not near the credit union's cap. Thus, a credit
union may purchase participations from other originators while awaiting
approval of its waiver request. Nevertheless, a purchasing credit union
should anticipate the need for a waiver and submit a waiver application
as early in the transaction process as possible. Blanket waivers may be
granted under appropriate circumstances.
The final rule allows NCUA to grant waivers from both the single
originator and single borrower concentration limitations. To further
clarify the waiver process, the final regulatory text articulates
NCUA's expectations for FICUs requesting waivers and NCUA's obligations
in reviewing such in Sec. 701.22(c).\24\ In order for the regional
director to review and process waiver applications as expeditiously as
possible, a FICU should include in its waiver application the following
information:
---------------------------------------------------------------------------
\24\ Proposed Sec. 701.22(c) addressed the minimum requirements
for a loan participation agreement. The agreement-related
requirements have been moved to Sec. 701.22(d) in the final rule.
---------------------------------------------------------------------------
A copy of all pertinent lending policies and underwriting
standards;
The requested higher limit;
An explanation of the need for increasing the limit;
Documentation supporting the credit union's ability to
manage and monitor this activity, including existing risk mitigation
measures;
Analysis of the credit union's prior experience with this
type of loan;
The loan participation master agreement;
Servicing agreements/contracts, if applicable; and
Documentation supporting the resolution of any material
problems identified in the most recent exam report's Document of
Resolution or any outstanding administrative actions. Stronger support
would be expected if a problem relates to loan participations, the type
of loan the credit union wants to purchase, or existing waivers.
Prior to the effective date of this final rule, NCUA intends to
issue supervisory guidance on evaluating credit union requests for
waivers of provisions in the loan participation rule.
E. Sec. 701.22(d)--Minimum Requirements for a Loan Participation
Agreement
The final rule revises current Sec. 701.22(b)(2), which requires
loan participation agreements to be in writing. It moves agreement-
related requirements to revised paragraph Sec. 701.22(d). The Board
recognizes that a successful loan participation relationship depends,
in large part, on the quality and completeness of the participation
agreement. A well-written
[[Page 37954]]
agreement can minimize intercreditor conflicts during the life of the
loan, especially if the loan becomes delinquent. Accordingly, the Board
believes that any participation agreement must clearly delineate the
roles, duties, and obligations of the originating lender, servicer, and
participants. In the final rule, revised Sec. 701.22(d) enumerates the
issues a loan participation agreement must, at a minimum, address in
order for a FICU to purchase the loan participation. For example, a
loan participation agreement must include a provision requiring an
originating lender to retain a certain percentage interest in the loan
throughout its duration. As discussed in more detail below, as mandated
by the FCU Act, the final rule requires originating FCUs to retain at
least 10 percent of the outstanding balance of the loan through the
life of the loan.\25\ The loan participation agreement must require
originating FISCUs, PISCUs, CUSOs, and other eligible organizations to
retain at least 5 percent, or higher, depending on applicable state
law. 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.
---------------------------------------------------------------------------
\25\ 12 U.S.C. 1757(5)(E).
---------------------------------------------------------------------------
These provisions emphasize the need for adequate documentation and
due diligence from before the time of purchase throughout the life of
the loan. Under Sec. 701.22(d)(4)(i), a loan participation agreement
must specify the loan or loans in which a credit union is purchasing an
interest. Where, for example, a participation agreement involves
multiple loans, the documentation can be as simple as an addendum or
schedule for identifying each loan and a participant's interest in that
loan. This provision also clarifies the existing prohibition against
purchasing a participation certificate in a pool of loans.
1. Risk Retention Requirement on Originating Lender
As noted above, the FCU Act mandates the 10 percent originating
lender retention requirement for FCUs.\26\ While some commenters
disagreed, most generally supported extending a similar risk retention
requirement to FISCUs. Of the supporters, most agreed that 10 percent
is reasonable, although many suggested 10 percent is too high. A number
of commenters recommended 5 percent as more appropriate. Other
commenters suggested various alternative thresholds. In addition,
several commenters contended that state law should control the risk
retention requirement for FISCUs. Commenters also suggested that any
originator in which a participating credit union has a direct or
indirect ownership interest (i.e., a CUSO) should be exempt from any
risk retention requirement.
---------------------------------------------------------------------------
\26\ Id.
---------------------------------------------------------------------------
The Board believes that, to minimize risk to the NCUSIF, a
meaningful risk retention requirement should apply to all originators,
without exception. Loan participation activities pose risks to the
NCUSIF irrespective of the originating lender's charter type. Requiring
the originating lender to retain an economic interest in the
participated loan incentivizes the originator to lend more responsibly
because it will have ``skin in the game.'' As some commenters noted,
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) \27\ imposed new risk retention requirements to address
problems in the securitization markets by requiring that securitizers
retain an economic interest in the credit risk of the assets they
securitize. Specifically, section 15G of the Securities Exchange Act of
1934, added by section 941(b) of the Dodd-Frank Act, generally requires
the securitizer of asset-backed securities (ABS) to retain not less
than 5 percent of the credit risk of the assets collateralizing the
ABS.\28\ By requiring securitizers to retain an economic interest in a
material portion of the credit risk for assets being securitized,
Congress intended the retention requirement to encourage sound lending
practices by creating strong incentives for securitizers to monitor the
quality of the assets underlying a securitization transaction.\29\ As
noted in the legislative history, ``[w]hen securitizers retain a
material amount of risk, they have `skin in the game,' aligning their
economic interest with those of investors in asset-backed securities.''
\30\
---------------------------------------------------------------------------
\27\ Public Law 111-203 (2010).
\28\ 15 U.S.C. 78o-11.
\29\ See S. Rept. 176, 111th Cong., at 212 (2010).
\30\ S. Rept. 176, 111th Cong., at 129 (2010).
---------------------------------------------------------------------------
While the FCU Act does not impose a retention requirement on
originating FISCUs, PISCUs, CUSOs, or other eligible organizations,
NCUA has long interpreted the FCU Act to require an originating lender
to retain a meaningful ownership interest in the loan to be considered
a participant and for the transaction to qualify as a loan
participation. Further, as noted above, the Board has long expressed
concerns that an originating lender may be disinclined to properly
underwrite a loan if it can later mitigate its risk by selling
participation interests in the loan.\31\
---------------------------------------------------------------------------
\31\ See 56 FR 15036 (Apr. 15, 1991).
---------------------------------------------------------------------------
Nevertheless, the Board supports and encourages the dual chartering
system. Upon review of the comments, the Board believes NCUA can
achieve the above-stated safety and soundness objectives with a
retention requirement that is less stringent than the proposed 10
percent threshold. Consistent with the Dodd-Frank Act's risk retention
standard, the Board believes a 5 percent minimum retention requirement
provides a significant economic stake for originators without being
overly restrictive. Accordingly, the final rule provides that, in order
for a FICU to purchase a loan participation from an eligible
organization, the loan participation agreement must require the
originating lender to retain at least 5 percent of the outstanding
balance of the loan through the life of the loan, unless applicable
state law establishes a higher retention threshold. This minimum 5
percent retention requirement applies to all originating eligible
organizations, including FISCUs, PISCUs, CUSOs, banks and other
financial organizations. If the originating lender is an FCU,
consistent with the FCU Act, the agreement must require the originating
FCU to retain at least 10 percent of the loan. The Board emphasizes
that, under the final rule, FCUs may purchase loan participations from
non-FCU originating lenders that retain at least 5 percent of the face
amount of the loan for the loan's duration. The 10 percent retention
requirement for FCUs applies only where the FCU is the originating
lender in a participation arrangement.
F. Related Regulatory Provisions
1. Sec. 701.23--Purchase, Sale, and Pledge of Eligible Obligations
The proposal added introductory text to Sec. 701.23 to clarify the
scope of Sec. 701.23 and to distinguish transactions under Sec.
701.23 from transactions covered by Sec. 701.22. The final rule adopts
the additional language substantially as proposed, but with some
amendments to conform it to a 2012 final rule promulgated by NCUA
eliminating the Regulatory Flexibility Program (RegFlex).\32\ The final
rule regarding RegFlex provides a limited exception to the general
requirement that an FCU's purchase, sale, or pledge of all or part of a
loan must be to one
[[Page 37955]]
of its own members.\33\ Specifically, the exception permits FCUs that
meet the well capitalized standard to buy loans from other FICUs
without regard to whether the loans are eligible obligations of the
purchasing FCU's members or the members of a liquidating credit union.
The final rule also makes a parallel conforming amendment to the
introductory text to Sec. 701.22 in this regard.
---------------------------------------------------------------------------
\32\ 77 FR 31981 (May 31, 2012).
\33\ 12 CFR 701.23(b)(2).
---------------------------------------------------------------------------
2. Sec. 741.8--Purchase of Assets and Assumption of Liabilities
Section 741.8 is a safety and soundness provision that requires,
with limited exceptions, all FICUs to receive approval from NCUA before
purchasing loans or assuming an assignment of deposits, shares, or
liabilities from any entity that is not insured by the NCUSIF.
Currently, there are no exceptions under Sec. 741.8 for loan
participation purchases but in practice an FCU is not required to
obtain separate regional director approval for loan participation
purchases that comply with the requirements of the loan participation
rule. The proposed rule amended Sec. 741.8 for consistency with this
current agency practice. The final rule inserts language in Sec. 741.8
specifying that regional director approval is not required under Sec.
741.8 for a FICU's loan participation purchase that complies with the
requirements in Sec. 701.22. The exclusion applies to both FCUs and
FISCUs. The finalized language is unmodified from the proposal.
3. Sec. 741.225--Loan Participations
The proposed rule amended Part 741 by adding a new Sec. 741.225 to
extend the requirements of Sec. 701.22 to FISCUs, noting there are
strong indications of potential risk to the NCUSIF from FISCUs' loan
participation activity. A number of commenters expressed concern that
the proposal would significantly undermine the dual chartering system,
contending that state law should govern loan participations for FISCUs.
Several commenters also questioned whether the data presented in the
proposal was sufficient to justify extending the loan participation
rule's coverage to FISCUs.
While the Board supports and encourages the dual chartering system,
FISCUs' increasing loan participation activity presents significant
potential risk to the NCUSIF, as discussed in the preamble to the
proposed rule.\34\ Since year-end 2007, FISCUs have been responsible
for approximately 54 percent of participation loans purchased and 61
percent of participation loans sold. FISCUs have also consistently
accounted for the majority of loan participations outstanding. Over
that same five-year period, FISCU-participated loan balances have
increased 31.4 percent, from $5.7 billion in December 2007 to $7.5
billion in December 2012. As of December 30, 2012, although FISCUs
represented only 37.4 percent of all federally insured credit unions,
FISCUs held 54.4 percent of loan participations outstanding. Among the
20 FICUs with the highest amount of participation loans outstanding, 12
(or 60 percent) were FISCUs.
---------------------------------------------------------------------------
\34\ 76 FR 79548, 79550 (Dec. 22, 2011).
---------------------------------------------------------------------------
Since 2007, FISCUs overall experienced a higher delinquency rate in
their loan participation portfolios. At year-end 2012, for example, the
delinquency rate for the FISCU-participated portfolio was 2.18 percent,
compared to 1.27 percent for FCUs. Of the 78 federally insured credit
unions reporting over 10 percent delinquency on participation loans, 52
(or 66.7 percent) were FISCUs. With regard to actual losses, charge-off
data for the last few years indicates FISCUs have experienced higher
losses on participation loans than FCUs. Indeed, the average net
charge-off rate for FISCUs for 2010-2012 was 1.48 percent, compared
with 0.77 percent for FCUs. Even though net charge-offs on
participation loans fell for both FISCUs and FCUs in 2012 with the
improving economy, the year-end net charge-off rate for FISCUs was more
than double the net charge-off rate for FCUs (1.46 percent vs. 0.62
percent).
Furthermore, the Board believes some safety and soundness
requirements should be applied to all FICUs to minimize risk to the
NCUSIF. FISCU involvement in loan participations currently is subject
only to state law, which may vary from NCUA's regulations and from
state to state. Section 201 of the FCU Act states the Board is
authorized to insure the member accounts of state-chartered credit
unions that have applied to, and been approved by, NCUA for federal
insurance coverage. Credit unions receiving federal insurance must
agree to comply with the requirements of Title II and any regulations
prescribed by the Board pursuant to Title II. Section 741.225 is being
added to Part 741 pursuant to this authority for the reasons discussed
above. The final rule adopts Sec. 741.225 substantively as proposed,
with one minor change to clarify that FISCUs, but not FCUs, are exempt
from Sec. 701.22(b)(4).
IV. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact any regulation may have on
a substantial number of small entities.\35\ For purposes of this
analysis, NCUA considers credit unions having under $50 million in
assets small entities.\36\ There were 4,604 credit unions under $50
million as of December 31, 2012. 398 small FICUs reported
participations outstanding at year-end 2012. In addition, 177 reported
purchasing participations, and 50 reported selling participations in
2012.\37\
---------------------------------------------------------------------------
\35\ 5 U.S.C. 603(a).
\36\ Interpretive Ruling and Policy Statement 87-2. 52 FR 35231.
(Sept. 18, 1987), as amended by IRPS 03-2, 68 FR 31949 (May 29,
2003) and IRPS 13-1 78 FR 4032 (Jan. 18, 2013).
\37\ There is overlap between these three groups of small credit
unions involved with participations.
---------------------------------------------------------------------------
NCUA does not believe the final rule will have a significant impact
on a substantial number of small credit unions. Loan participations are
a means for institutions to diversify risk and to employ excess lending
capacity. Generally, smaller credit unions are not actively involved in
loan participation transactions. The $5 million threshold and the
waiver process will further limit the impact on small credit unions.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or modifies an existing burden.\38\ For purposes of the PRA, a
paperwork burden may take the form of either a reporting or a
recordkeeping requirement, both referred to as information collections.
---------------------------------------------------------------------------
\38\ 44 U.S.C. 3507(d); 5 CFR part 1320.
---------------------------------------------------------------------------
The final rule contains an information collection in the form of a
written policy requirement and a transaction documentation requirement.
All FICUs purchasing loan participations must have a written loan
participation policy. In addition, before purchasing a loan
participation, a FICU must enter into a written loan participation
agreement that specifically identifies the subject loans and other
material information. As required by the PRA, NCUA has submitted a copy
of this final rule to OMB for its review and approval. Persons
interested in submitting comments with respect to the information
collection aspects of the proposed IRPS should submit them to OMB at
the address noted below.
[[Page 37956]]
Based on NCUA's experience, credit unions generally maintain
written loan participation policies and enter into written agreements
when purchasing loan participations. As such, they will only need to
modify their practices to comply with the final rule. It is, therefore,
NCUA's view that maintaining a written loan participation policy and
executing written participation purchase agreements are not new burdens
created by this regulation. 1,482 FICUs reported participations
outstanding at year-end 2012. Based on the current volume of reported
loan participation activity, NCUA estimates approximately 1,482 FICUs
will need to modify a written loan participation policy. NCUA further
estimates it should take a credit union an average of 4 hours to modify
its loan participation policy. The total annual burden imposed is
approximately 5,928 hours. With regard to executing a written loan
participation agreement, NCUA estimates the regulation will cause no
additional burden.
NCUA considers comments by the public on this proposed collection
of information in:
Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the NCUA,
including whether the information will have a practical use;
Evaluating the accuracy of the NCUA's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the
information to be collected; and
Minimizing the burden of collection of information on
those who are required to respond, including through the use of
appropriate automated, electronic, mechanical, or other technological
collection techniques or other forms of information technology; e.g.,
permitting electronic submission of responses.
Comments on the information collection requirements should be sent
to: Office of Information and Regulatory Affairs, OMB, New Executive
Office Building, 725 17th Street, NW., Washington, DC 20503; Attention:
NCUA Desk Officer, with a copy to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
C. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency,\39\ voluntarily complies with the Executive Order.
Among others, the final rule applies to federally insured, state-
chartered credit unions. By law, these institutions are already subject
to numerous provisions of NCUA's rules, based on the agency's role as
the insurer of member share accounts and the significant interest NCUA
has in the safety and soundness of their operations. The final rule may
have an occasional direct effect on the states, the relationship
between the national government and the states, or on the distribution
of power and responsibilities among the various levels of government.
This final rule may supersede provisions of state law, regulation, or
approvals. The final rule could lead to conflicts between the NCUA and
state financial institution regulators on occasion; however, based on
comments received on the proposed rule, NCUA has made modifications in
this final rule to minimize conflicts in this area. For example, as
discussed above, the final rule provides that for originating lenders
that are FISCUs, the minimum risk retention requirement is 5 percent,
unless applicable state law establishes a higher retention threshold.
In addition, waivers for FISCUs from any provision of the final rule
will require the concurrence of the appropriate state supervisory
authority.
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\39\ 44 U.S.C. 3502(5).
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D. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
NCUA has determined that this final rule will not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999.\40\
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\40\ Public Law 105-277, 112 Stat. 2681 (1998).
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E. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996\41\
(SBREFA) provides generally for congressional review of agency rules. A
reporting requirement is triggered in instances where NCUA issues a
final rule as defined by Section 551 of the Administrative Procedure
Act.\42\ NCUA does not believe this final rule is a ``major rule''
within the meaning of the relevant sections of SBREFA. NCUA has
submitted the rule to the Office of Management and Budget for its
determination in that regard.
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\41\ Public Law 104-121, 110 Stat. 857 (1996).
\42\ 5 U.S.C. 551.
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List of Subjects
12 CFR Part 701
Credit unions, Fair housing, Individuals with disabilities,
Insurance, Marital status discrimination, Mortgages, Religious
discrimination, Reporting and recordkeeping requirements, Sex
discrimination, Signs and symbols, Surety bonds.
12 CFR Part 741
Credit, Credit unions, Reporting and recordkeeping requirements,
Share insurance.
12 CFR Part 742
Credit unions.
By the National Credit Union Administration Board, on June 20,
2013.
Mary F. Rupp,
Secretary of the Board.
For the reasons discussed above, the NCUA Board amends 12 CFR part
701 as follows:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
0
1. The authority citation for part 701 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782,
1787, 1789; Title V, Pub. L. 109-351, 120 Stat. 1966.
0
2. Revise Sec. 701.22 to read as follows:
Sec. 701.22 Loan participations.
This section applies only to loan participations as defined in
paragraph (a) of this section. It does not apply to the purchase of an
investment interest in a pool of loans. This section establishes the
requirements a federally insured credit union must satisfy to purchase
a participation in a loan. This section applies only to a federally
insured credit union's purchase of a loan participation where the
borrower is not a member of that credit union and where a continuing
contractual obligation between the seller and purchaser is
contemplated. Generally, a federal credit union's purchase of all or
part of a loan made to one of its own members, subject to a limited
exception for certain well capitalized federal credit unions in Sec.
701.23(b)(2), where no continuing contractual obligation between the
seller and purchaser is contemplated, is governed by Sec. 701.23 of
this part. Federally insured, state-chartered credit unions are
required by Sec. 741.225 of this chapter to comply with
[[Page 37957]]
the loan participation requirements of this section. This section does
not apply to corporate credit unions, as that term is defined in Sec.
704.2 of this chapter.
(a) For purposes of this section, the following definitions apply:
Associated borrower means any borrower with a shared ownership,
investment, or other pecuniary interest in a business or commercial
endeavor with the borrower. This includes guarantors, co-signors, major
stakeholders, owners, investors, affiliates and other parties who have
influence on the management, control, or operations of the borrower.
Credit union means any federal or state-chartered credit union.
Credit union organization means any credit union service
organization meeting the requirements of part 712 of this chapter. This
term does not include trade associations or membership organizations
principally composed of credit unions.
Eligible organization means a credit union, credit union
organization, or financial organization.
Financial organization means any federally chartered or federally
insured financial institution; and any state or federal government
agency and its subdivisions.
Loan participation means a loan where one or more eligible
organizations participate pursuant to a written agreement with the
originating lender, and the written agreement requires the originating
lender's continuing participation throughout the life of the loan.
Originating lender means the participant with which the borrower
initially or originally contracts for a loan and who, thereafter or
concurrently with the funding of the loan, sells participations to
other lenders.
(b) A federally insured credit union may purchase a participation
interest in a loan from an eligible organization only if the loan is
one the purchasing credit union is empowered to grant and the following
additional conditions are satisfied:
(1) The purchase complies with all regulatory requirements to the
same extent as if the purchasing federally insured credit union had
originated the loan, including, for example, the loans-to-one-borrower
provisions in Sec. 701.21(c)(5) of this part for federal credit unions
and Sec. 723.8 of the member business loans rule in part 723 of this
chapter for all federally insured credit unions;
(2) The purchasing federally insured credit union has executed a
written loan participation agreement with the originating lender and
the agreement meets the minimum requirements for a loan participation
agreement as described in paragraph (d) of this section;
(3) The originating lender retains an interest in each participated
loan. If the originating lender is a federal credit union, the retained
interest must be at least 10 percent of the outstanding balance of the
loan through the life of the loan. If the originating lender is any
other type of eligible organization, the retained interest must be at
least 5 percent of the outstanding balance of the loan through the life
of the loan, unless a higher percentage is required under applicable
state law;
(4) The borrower becomes a member of one of the participating
credit unions before the purchasing federally insured credit union
purchases a participation interest in the loan; and
(5) The purchase complies with the purchasing federally insured
credit union's internal written loan participation policy, which, at a
minimum, must:
(i) Establish underwriting standards for loan participations;
(ii) Establish a limit on the aggregate amount of loan
participations that may be purchased from any one originating lender,
not to exceed the greater of $5,000,000 or 100 percent of the federally
insured credit union's net worth, unless this amount is waived by the
appropriate regional director, and, in the case of a federally insured,
state-chartered credit union, with prior written concurrence of the
appropriate state supervisory authority;
(iii) Establish limits on the amount of loan participations that
may be purchased by each loan type, not to exceed a specified
percentage of the federally insured credit union's net worth; and
(iv) Establish a limit on the aggregate amount of loan
participations that may be purchased with respect to a single borrower,
or group of associated borrowers, not to exceed 15 percent of the
federally insured credit union's net worth, unless waived by the
appropriate regional director, and, in the case of a federally insured,
state-chartered credit union, with prior written concurrence of the
appropriate state supervisory authority.
(c) To seek a waiver from any of the limitations in paragraph (b)
of this section, a federally insured credit union must submit a written
request to its regional director with a full and detailed explanation
of why it is requesting the waiver. Within 45 days of receipt of a
completed waiver request, including all necessary supporting
documentation and, if appropriate, any written concurrence, the
regional director will provide the federally insured credit union a
written response. The regional director's decision will be based on
safety and soundness and other considerations; however, the regional
director will not grant a waiver to a federally insured, state-
chartered credit union without the prior written concurrence of the
appropriate state supervisory authority. A federally insured credit
union may appeal any part of the waiver determination to the NCUA
Board. Appeals must be submitted through the regional director within
60 days of the date of the determination.
(d) A loan participation agreement must:
(1) Be properly executed by authorized representatives of all
parties under applicable law;
(2) Be properly authorized by the federally insured credit union's
board of directors or, if the board has so delegated in its policy, a
designated committee or senior management official, under the federally
insured credit union's bylaws and all applicable law;
(3) Be retained in the federally insured credit union's office
(original or copies); and
(4) Include provisions which, at a minimum, address the following:
(i) Prior to purchase, the identification of the specific loan
participation(s) being purchased, either directly in the agreement or
through a document which is incorporated by reference into the
agreement;
(ii) The interest that the originating lender will retain in the
loan to be participated. If the originating lender is a federal credit
union, the retained interest must be at least 10 percent of the
outstanding balance of the loan through the life of the loan. If the
originating lender is any other type of eligible organization, the
retained interest must be at least 5 percent of the outstanding balance
of the loan through the life of the loan, unless a higher percentage is
required under state law;
(iii) The location and custodian for original loan documents;
(iv) An explanation of the conditions under which parties to the
agreement can gain access to financial and other performance
information about a loan, the borrower, and the servicer so the parties
can monitor the loan;
(v) An explanation of the duties and responsibilities of the
originating lender, servicer, and participants with respect to all
aspects of the participation, including servicing, default,
foreclosure, collection, and
[[Page 37958]]
other matters involving the ongoing administration of the loan; and
(vi) Circumstances and conditions under which participants may
replace the servicer.
0
3. Amend Sec. 701.23 by adding introductory text to read as follows:
Sec. 701.23 Purchase, sale, and pledge of eligible obligations.
This section governs a federal credit union's purchase, sale, or
pledge of all or part of a loan to one of its own members, subject to a
limited exception for certain well capitalized federal credit unions,
where no continuing contractual obligation between the seller and
purchaser is contemplated. For purchases of eligible obligations,
except as described in paragraph (b)(2) of this section, the borrower
must be a member of the purchasing federal credit union before the
purchase is made. A federal credit union may not purchase a non-member
loan to hold in its portfolio.
* * * * *
PART 741--REQUIREMENTS FOR INSURANCE
0
4. The authority citation for part 741 continues to read as follows:
Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31
U.S.C. 3717.
Subpart A--Regulations Applicable to Both Federal Credit Unions and
Federally Insured, State-Chartered Credit Unions That Are Not
Codified Elsewhere in NCUA's Regulations
0
5. Amend Sec. 741.8 by:
0
a. Removing the word ``or'' appearing at the end of paragraph (b)(2);
0
b. Adding the word ``or'' after the semicolon appearing at the end of
paragraph (b)(3); and
0
c. Adding paragraph (b)(4).
The addition reads as follows:
Sec. 741.8 Purchase of assets and assumption of liabilities.
* * * * *
(b) * * *
(4) Purchases of loan participations as defined in and meeting the
requirements of Sec. 701.22 of this chapter.
* * * * *
0
6. Add Sec. 741.225 to read as follows:
Sec. 741.225 Loan participations.
Any credit union that is insured pursuant to Title II of the Act
must adhere to the requirements stated in Sec. 701.22 of this chapter,
except that federally insured, state-chartered credit unions are exempt
from the requirement in Sec. 701.22(b)(4).
[FR Doc. 2013-15178 Filed 6-24-13; 8:45 am]
BILLING CODE 7535-01-P
