[Federal Register Volume 60, Number 148 (Wednesday, August 2, 1995)]
[Proposed Rules]
[Pages 39273-39274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18892]



 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 60, No. 148 / Wednesday, August 2, 1995 / 
Proposed Rules  


[[Page 39273]]


NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701


Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) is committed to providing federal 
credit unions (FCUs) greater flexibility in pursuing lending 
opportunities that are consistent with principles of safety and 
soundness. The NCUA Board is therefore proposing to amend its 
regulations on loan participation to broaden loan participation 
authority by removing the requirement that the participation agreement 
precede loan disbursement.

DATES: Comments must be postmarked or posted on the NCUA electronic 
bulletin board by October 2, 1995.

ADDRESSES: Send comments to Becky Baker, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.

FOR FURTHER INFORMATION CONTACT: Mary F. Rupp, Staff Attorney, Office 
of General Counsel, National Credit Union Administration, 1775 Duke 
Street, Alexandria, Virginia 22314-3428 or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    NCUA's current ``participation loan'' regulation requires the 
participation agreement to precede any disbursement of the loan 
proceeds. When Section 701.22 of NCUA's Rules and Regulations was 
originally issued, the Board discussed the term ``participation'' as 
follows:

    In granting Federal credit unions the power to participate in 
making loans to members, Congress was using the term 
``participation'' to mean arrangements made prior to or at the time 
of origination and carried out within a reasonable time thereafter. 
Thus, 107(13) (of the Federal Credit Union Act, 12 U.S.C. 
Sec. 1757(13)) was adopted to allow Federal credit unions to sell 
certain loans subsequent to origination * * *

    43 FR 51610 (November 6, 1978). However, the Board amended its 
opinion in 1981 as follows:

    The participation regulation applies where a third party funnels 
funds into the credit union with the intent of actually 
participating in making the loan, for example where the participant 
will assist in preparing the loan documentation and the 
participant's funds will actually be disbursed at origination. The 
participation regulation does not apply when an organization merely 
arranges to purchase loans subsequently originated by the credit 
union.
    49 FR 31660 (June 17, 1981).

    In 1991, the Board considered but later rejected changes which 
would have amended the definition of ``participation loan'' and deleted 
the requirement that the loan participation agreement precede loan 
disbursement. The Board was concerned that:

    FCUs 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. Alternatively, FCUs interested in 
obtaining a participation after the loan is made may not properly 
investigate the loan and may instead rely on the original 
participants to have properly underwritten the loan. FCUs may jump 
in without a proper due diligence review.
    56 FR 15034, 15035 (April 15, 1991).

    The Board now believes that the concerns it expressed in 1991 can 
be addressed through the FCUs exercise of due diligence before entering 
into participation agreements as required in this proposal. The FCU is 
still required to have a master participation agreement. The proposal 
does not specify at what point the agreement must be executed. The 
Board invites comment on whether the rule should require that the 
agreement (without identifying the specific loans) must be in place 
prior to the disbursement of the loan if the loan is intended for 
participation, and prior to the sale of the loan if the loan was 
originally made to hold in portfolio.
    Although the regulation does not require that specific provisions 
be included in the master agreement, prudence dictates that at a 
minimum the agreement shall: (1) Identify types of loans; (2) state 
servicing and collection requirements; (3) provide that in the event of 
a loss each participant shall share in the loss equal to its interest 
in the participation loan; (4) provide for the distribution of payments 
of principal to each participant proportionate to its interest in the 
participation loan; (5) provide for loan status reports to each 
participant; and (6) state the terms or conditions under which the 
agreement may be terminated or modified.
    Under the proposal, the ``originating lender'' is required to use 
the same underwriting standards it uses for loans that are not being 
sold as participation loans unless there is a participation agreement 
in place prior to the disbursement of the loan. If a participation 
agreement is in place prior to disbursement, all of the participating 
credit unions will have agreed on underwriting standards. The 
originating lender would reflect those standards either in its loan 
policies or the participation agreement. Also, the proposal requires 
the purchaser of a participation interest to have a participation 
policy in place prior to entering into a participation agreement.
    Current Section 701.22(b)(2), as well as the proposed rule, allow 
either the board of directors or the investment committee to execute 
the participation agreement. In recognition of the far reaching impact 
a participation agreement has on an FCU's lending, investment and 
business strategies, the Board is interested in receiving comments on 
whether this authority should be solely with the board of directors.
    With these safeguards in place, it is contemplated that eliminating 
the ``prior to disbursement'' restriction may assist FCUs with their 
liquidity management and will also provide FCUs with a means of 
reducing risk. By deleting this requirement, the Board recognizes that 
there may be some overlap between Sections 701.22 and 701.23 of NCUA's 
Rules and Regulations; the eligible obligations rule. This is a result 
of the interplay of Sections 107(5)(E) and 107(13) of the FCU Act. Both 
of these sections authorize the purchase and sale of a partial interest 
in certain loans. A loan purchase or sale will be viewed as permissible 
provided it is authorized under either section.
    The Board welcomes comment on this proposal. 

[[Page 39274]]


B. Section-by-Section Analysis

Proposed Section 701.22(a)(1)

    Deletes the requirement that the participation agreement precede 
disbursement of the loan but retains the requirement of a participation 
agreement and that the participation be made with ``eligible 
organizations.''

Proposed Section 701.22(b)(2)

    The phrase ``prior to final disbursement'' has been eliminated.

Proposed Section 701.22(c)(4)

    A phrase has been added to the ``originating lender'' approval 
provision requiring the FCU to use the same underwriting standard for 
participation loans as those used for loans not being sold as 
participation loans unless there is a participation agreement in place 
prior to the disbursement of the loan. An additional sentence has also 
been added, requiring that, where a participation agreement is in place 
prior to disbursement, either the originating credit union's loan 
policies or the participation agreement addresses participation loan 
underwriting standards.

Proposed Section 701.22(d)(1)

    A phrase has been added to the ``non originating lender'' approval 
provision requiring the FCU to have a participation policy in place 
prior to entering into a participation agreement.

C. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the NCUA to prepare an 
analysis to describe any significant economic impact any regulation may 
have on a potential number of small credit unions (primarily those 
under $1 million in assets). The NCUA Board has determined and 
certifies under the authority granted in 5 U.S.C. 605(b) that the 
proposed rule, if adopted, will not have a significant economic impact 
on a substantial number of small credit unions. Accordingly, the NCUA 
Board has determined that a Regulatory Flexibility Analysis is not 
required.
Paperwork Reduction Act

    These amendments do not change the paperwork requirements.

Executive Order 12612

    This amendment does not affect state regulation of credit unions. 
It implements provisions of the Federal Credit Union Act applying only 
to federal credit unions.

List of Subjects in 12 CFR Part 701

    Credit, Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on July 27, 
1995.
Becky Baker,
Secretary of the Board.

    Accordingly, NCUA proposes to amend 12 CFR chapter VII 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), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, 1789 and Pub. L. 101-73. 
Section 701.6 is also authorized by 31 U.S.C. 3717. Section 701.31 
is also authorized by 15 U.S.C. 1601, et seq., 42 U.S.C. 1981 and 42 
U.S.C. 3601-3610.
    Section 701.35 is also authorized by 12 U.S.C. 4311-4312.

    2. Section 701.22 is amended by revising paragraphs (a)(1), (b)(2), 
(c)(4) and (d)(1) to read as follows:


Sec. 701.22  Loan participation.

    (a) * * *
    (1) Participation loan is a loan where one or more eligible 
organizations participates pursuant to a written agreement with the 
originating lender.
* * * * *
    (b) * * *
    (2) A written master participation agreement shall be properly 
executed, acted upon by the Federal credit union's board of directors 
or the investment committee and retained in the Federal credit union's 
office. The agreement shall include provisions which identify the 
participation loan or loans; and
* * * * *
    (c) * * *
    (4) Require the credit committee or loan officer to use the same 
underwriting standards for participation loans used for loans that are 
not being sold in a participation agreement unless there is a 
participation agreement in place prior to the disbursement of the loan. 
Where 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.
    (d) * * *
    (1) Participate only in loans it is empowered to grant, having a 
participation policy in place which sets forth the loan underwriting 
standards prior to entering into a participation agreement;
* * * * *
[FR Doc. 95-18892 Filed 8-1-95; 8:45 am]
BILLING CODE 7535-01-P