[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]


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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.

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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.
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    \1\ 76 FR 79548 (Dec. 22, 2011).
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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.
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    \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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    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.
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    \3\ 12 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 
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.
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    \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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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.
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    \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.
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    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\
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    \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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    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\
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    \12\ See OGC Op. 04-0713 (Oct. 25, 2004).
    \13\ 12 U.S.C. 1757(5)(E).
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    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.
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    \14\ 76 FR 79548, 79549 (Dec. 22, 2011).
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    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\
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    \15\ 12 CFR 723.8.
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    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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