[Federal Register Volume 60, Number 227 (Monday, November 27, 1995)]
[Rules and Regulations]
[Pages 58203-58204]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28704]



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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701


Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board is broadening loan participation authority by 
removing the requirement that the participation agreement precede the 
originating loan's disbursement. Deleting this requirement will provide 
federal credit unions (FCUs) more flexibility to manage liquidity.

EFFECTIVE DATE: January 26, 1996.

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:

Background

    The rule proposed by the Board would delete the current requirement 
that the participation agreement precede any disbursement of the 
originating loan's proceeds. 60 FR 39273 (August 2, 1995). The proposal 
required the ``originating lender'' 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 required the purchaser of a participation 
interest to have a 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.

Summary of Comments

    The NCUA received 35 comments on the proposed rule: 27 from credit 
unions; 3 from credit union trade groups; 4 from credit union leagues; 
and 1 from an attorney. All 35 commenters support deleting the 
requirement that the loan participation agreement precede the loan 
disbursement. Some of the recurring reasons given in support were that 
it will: enable credit unions to increase their loan-to-share ratios if 
they desire; enable credit unions with high loan-to-share ratio to sell 
loans and increase service to members by originating more loans; enable 
small credit unions to better service their members; be used by credit 
unions as a liquidity management tool; and enable credit unions to help 
each other.
    Comments were requested on two specific issues. The first issue is 
whether the rule should require that an agreement be in place either 
prior to the disbursement of the loan if that loan is intended for a 
participation or prior to the sale if the loan was originally made to 
hold in portfolio. Five commenters supported a requirement that the 
participation agreement be executed prior to disbursal of the loan if 
the loan is intended for participation. However, as one commenter 
noted, it would be difficult to determine the intent of the lender at 
the time the loan is made. As the rule requires the originating lender 
to use the same underwriting standards it uses for its nonparticipation 
loans, unless it has a participation agreement in place, the Board does 
not believe the additional requirement is necessary.
    Six commenters said that the rule should require a participation 
agreement to be in place prior to the sale of the loan. This 
requirement is in the proposed rule and we have adopted it in the final 
rule. Section 701.22(b)(2) has been modified in the final rule to 
clarify that the loans must be identified prior to their sale and that 
the identification need not occur in the master participation agreement 
but may be in an addendum to the agreement in a format to be determined 
by the participating credit unions.
    The second specific request for comment was whether the final rule 
should be amended to limit execution of the participation agreement to 
the board of directors. The current Section 701.22(b)(2), as well as 
the proposed rule, permit the board of directors to determine whether 
they or the investment committee will execute a participation 
agreement. Of the 17 commenters that responded to the issue, all agreed 
that the authority to execute should not be limited to the board of 
directors and some suggested expanding the authority to include 
management. The commenters noted that Section 701.22(b) limits the 
formulation of a participation policy to the board of directors. Those 
executing the agreement would be acting within policies established by 
the board of directors. With these safeguards in place, the Board 
agrees that the credit union board of directors should have this 
greater flexibility to delegate execution of the master participation 
agreement to either the investment committee or senior management.
    One commenter suggested that the final rule require ``no less 
stringent underwriting standards for participation loans than for non-
participation loans.'' As stated in the preamble to the proposal, 
credit unions are expected to ``exercise due diligence before entering 
into participation agreements * * *.'' 60 FR 39273 (August 2, 1995). 
The amendments will allow a small credit union which, for example, has 
liquidity problems and limits on loan amounts, to enter into a 
participation agreement with a larger credit union which sets unique 
loan participation underwriting standards. The participation agreement 
may provide for higher loan amounts because the small credit union is 
assured that a portion of the loan will be purchased by the larger 
credit union.
    A few commenters asked the Board to consider relaxing current 
Section 701.22(c)(2) which requires the originating lender to maintain 
a ten percent interest in the loans it sells. This provision is 
mandated by Section 107(5)(E) of the Federal Credit Union Act (12 
U.S.C. 1757(5)(E)) which the Board may not amend by a regulation. 

[[Page 58204]]


Final Rule

    The final rule adopts with minor modifications the proposed rule 
published on August 2, 1995. 60 FR 39273.

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 final 
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

    NCUA has determined that the requirement to establish a written 
participation policy and agreement in connection with loan 
participations constitutes a collection of information under the 
Paperwork Reduction Act. The Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget (OMB) require that 
the public be provided an opportunity to comment on information 
collection requirements, including an agency's estimate of the burden 
of the collection of information. 60 FR 44978 (August 29, 1995). The 
requirement to have a participation agreement exists under the current 
rule. 12 C.F.R. 701.22(b)(2). NCUA estimates that no more than 1000 
federal credit unions will seek to implement a loan participation 
program. It is NCUA's view that the time spent developing a policy and 
agreement is not a burden created by this regulation but rather is 
necessary to establish a safe and sound loan participation program. The 
paperwork burden created by this rule is the requirement that such 
policy and agreement be put in writing. NCUA estimates that it should 
take three hours to prepare the participation policy and one hour to 
put a participation agreement in written form. Therefore, 4000 total 
burden hours are required to comply with the collection requirement.
    The NCUA Board invites comment on: (1) Whether the collection of 
information is necessary for the proper performance of the functions of 
NCUA, including whether the information will have practical utility; 
(2) the accuracy of NCUA's estimate of the burden of the collection of 
information; (3) ways to enhance the quality, utility, and clarity of 
the information to be collected; and (4) ways to minimize the burden of 
the collection of information. Send comments to Suzanne Beauchesne, 
National Credit Union Administration, 1775 Duke Street, Alexandria, VA 
22314-3428. Comments should be postmarked by January 26, 1996.
    After 60 days, NCUA will submit the paperwork requirement to OMB 
for review under the Paperwork Reduction Act and will publish a notice 
to that effect in the Federal Register. NCUA will also publish a 
document in the Federal Register once OMB takes action on the submitted 
request. Until NCUA receives an OMB control number indicating approval 
of the requirement that participation policies and agreements be put in 
writing, a credit union is not required to comply with that 
requirement.

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 November 
16, 1995.
Becky Baker,
Secretary of the Board.
    Accordingly, NCUA amends 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 means 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 if the board has so delegated in its policy, the investment 
committee or senior management official(s) and retained in the Federal 
credit union's office. The master agreement shall include provisions 
for identifying, either through a document which is incorporated by 
reference into the master agreement or directly in the master 
agreement, the participation loan or loans prior to their sale; 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. 95-28704 Filed 11-24-95; 8:45 am]
BILLING CODE 7535-01-U