Download This sample credit union business lending loan participation policy

This sample credit union business lending loan participation policy is provided at no
charge by CenCorp Business Solutions, LLC (CBS) to members.
This sample policy is provided for illustrative purposes only. It does not necessarily
contain provisions appropriate for all credit unions. Each credit union should adopt a
board of directors approved business lending loan participation policy that is designed for
its business lending practices that has been reviewed by its internal compliance officer and
legal counsel. CBS makes no representation or warranty regarding this sample policy. If a
transaction does not meet the requirements of a “loan participation” under NCUA
Regulation 701.22 and is not underwritten to the compliance standards of NCUA
Regulation 723, credit unions should follow the purchase and assumption rule outlined in
NCUA Regulation 741.8, which requires approval by the Regional Director.
SAMPLE BUSINESS LOAN PARTICIPATION POLICY
It shall be the policy of Sample Credit Union (SCU) to engage in business participation loans as
buyer or seller/originator as a mechanism to promote growth, manage regulatory limits, interest
rates, liquidity, credit and geographic concentration risks. Management shall be responsible for
the nature and size of the loan participation portfolio and for its overall safety and soundness.
Purchases of interests in loans shall be primarily secured by real estate although up to 20% of the
purchased participation portfolio may be in loans secured by equipment. This percentile
provision will not apply unless the total purchased loan participation portfolio exceeds
$1,000,000. No interest in any loan will be purchased unless the originating credit union or
financial organization1 retains at least a 10% interest in each loan originated. Interests in loan
participations held by SCU shall be added to member business loan balances for purpose of
calculating the aggregate portfolio limit. All sales of participation loan interests will be without
recourse to SCU.2
SCU will limit its interest in a participation loan to where the purchased balance of the loan
combined with any other indebtedness of the borrower is 10% or less of SCU’s unimpaired
capital and surplus.3
1
CBS is unable to reconcile the statement made in NCUA Regulation 701.22 (a), (2) and (5) regarding the eligibility
of a “financial organization” (italicized in the sample policy) to participate and NCUA Regulation 701.22 (d), (2),
which limits participations only to loans made to “…its own members or members of another participating credit
union.” CBS therefore recommends that you limit participation loans only to other credit unions unless this is
clarified by the NCUA. Another option may be to arrange for the borrower to become a member at the
participating credit union.
“Financial organization” is defined in the regulation as follows: “Financial organization means any federally
chartered or federally insured financial institution; and any state or federal government agency and their
subdivisions.”
2
NCUA Letter no. 08-CU-26
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NCUA Regulation 701.22
SCU will only originate loans to be participated with its members and will maintain a minimum
interest of at least 10% in such loans. Original or copies of all loan documents will be
maintained by SCU on all loan interests purchased or sold. Management shall use the same
underwriting standards for all participation loans as it uses for loans that are to be wholly
retained in its portfolio. When a participation agreement is in place prior to disbursement, either
the credit union’s loan policies or the participation agreement shall address any variance from
non-participation loan underwriting standards.
When participating in loans that SCU does not originate, SCU will participate only in loans that
it is empowered to grant and all such loans will be underwritten to comply with NCUA
Regulation 723 guidelines pursuant to SCU’s board of directors approved member business
lending and any other applicable SCU policies. Further, management shall obtain loan minutes,
or other evidence of loan approval by the originating credit union’s or financial organization’s
board of directors or management. All participation loans must be made to SCU members or
that of another participating credit union or federally insured financial organization.
A written master participation agreement or document referencing such an agreement by and
between seller and buyer shall be properly executed by the board of directors or delegated
management officials evidencing and identifying all participated loans prior to any actual
purchase or sale of loan interests.
Servicing, Loan Control and Credit Risk Management
SCU may purchase, or retain the servicing of any loan that it owns a participation interest in. If
the loan is not serviced internally, management shall obtain a servicing agreement, if such
information is not contained in the participation agreement. The servicing agreement should
specify the duties, responsibilities, actions, and notification functions that the loan servicer shall
provide.
Due diligence with regard to review of Professional Liability Insurance for any CUSO or third
party involved in loan underwriting for purchased loans to SCU shall be accomplished by
management. Biographical information on the experience of the loan underwriter should be
obtained if SCU is relying on a CUSO, or third party underwriter, that is not normally engaged
by the credit union for member business loan analysis to assure a NCUA Regulation 723
compliant level of experience in the review of loans considered for purchase or sale. SCU may
use a qualified third party or CUSO to review participation loans, facilitate loan sales
transactions and service such loans. However, no third party or CUSO shall also act as a loan
originator, broker, or loan officer (with direct borrower contact), and then underwrite and act as a
seller of the participation interest. In such cases, SCU will require independent compliant
underwriting from a qualified underwriter or CUSO in order to avoid any potential conflict of
interest.
Management shall review the financial condition of any selling financial institution’s financial
condition including a review of the prior year annual statement and current 5300 Report.
Management will monitor the performance of all loan servicing functions whether internal or
external as loan originator or purchasing participant and report the status of all participated loans
to SCU’s board of directors. The report should contain sufficient data to allow reaction in a
timely manner to loan delinquencies or other loan conditions that could threaten SCU’s interests:
2
Note: The following bullet points may take on the aspect of a procedure rather than policy.
Users have an option of deleting the section from the policy and adhering to it as a
procedure. CBS strongly recommends that a credit union adhere to the following in either
case. (User - delete this note.)
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Distribute payments to participants upon receipt of collected funds following receipt for
participation loans with appropriate accounting and notification to participants.
Send monthly loan payment or maturity due notices to borrowers.
Complete and mail annually by January 31st an annual principal and interest summary to
each borrower for the preceding calendar year.
Track property insurance expiration dates on collateral and notify management of
expiration and coverage amounts.
Track property taxes due on real estate and notify management of paid through date.
Track UCC financing statement expiration, prepare and file continuations in a timely
manner.
Track date of titled vehicle lien expiration, if appropriate.
Track date of last business financial statement and notify management of date.
Track date of last personal financial statement on guarantors and notify management of
date.
Track date of last business tax returns and notify management of date.
Track date of last personal tax returns and notify management of date.
Send annual notice to borrower requesting updated financial statements and tax returns
and any other requirement of the lending agreement or participation agreement to
minimize risk or undue exposure to the credit union.
Verify lien perfection on collateral post-closing and report confirmation of perfection.
Track payment due dates.
Require annual review of financial performance on the loan.
Track any other special loan covenant requirements.
An internal post closing review of any participation loan interest shall be performed to assure
that the appropriate loan documents have been executed, security interests filed and that all terms
and conditions are in accordance with the original approval terms. Management will regularly
monitor the financial health of the originating lender and remain in regular and periodic contact
with an identified person at the originating credit union, or lender, who is responsible for the
administration of any loan that SCU holds a participation interest. Management is to remain
aware of loan status and delinquency and for the purpose of risk mitigation, collection response
coordination, loan covenant enforcement, servicing exception report review and corrective
actions.
Concurrent Funding
Management will not exceed regulatory limits when originating participation loans for sale.
Approval of loans over the credit unions lending cap must be conditioned on obtaining loan
participation agreements from the buying credit unions. Buyers shall fund the full amount of
their participation interest concurrently with loan closing.
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Participation Certificate
Management shall issue as seller, or receive as buyer, an executed participation certificate in
addition to a participation agreement. The participation certificate shall act as a payment receipt,
identify the buyer and seller of a participation interest and shall reference the participation
agreement. It shall indentify the borrower, date of loan and principal amount involved in the
transaction. In addition, it shall specify interest rate, loan maturity date and percent or amount of
the loan purchased or sold.
Pre-Purchase Due Diligence
Prior to the purchase of any participation interest, management shall assure that the loan file
contains complete and current financial information and updated credit reports on any
prospective guarantors. Management is to base the purchase decision on the review of a recent
and compliant loan underwriting report. Further, a complete set of the prospective loan’s
documentation must also be reviewed and accepted by management. When such documentation
is not familiar to management, as in a case of the purchase of an existing loan interest, the loan
file is to be reviewed by SCU counsel when SCU’s interest in the loan exceeds $___, ___. The
legal review shall include an opinion by counsel on the enforceability of the loan documents,
covenants, security interests and agreements, mortgages, collateral position and any other
provisions that may impair the collectability of the loan and enforceability of the credit unions
rights and remedies.
Optional Provisions
1) Require all loan interests to have personal guarantees of principals unless non-profit
entities. (Recommended by CBS)
2) Loan interests may be purchased that originate in Michigan or a contiguous state
although the board of directors may approve exceptions to this trade area limitation from
time to time.
Revised: 1/2010 MBD
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