12 Cfr 701.22

§ 701.22

12 CFR Ch. VII (1–1–18 Edition)

generally accepted accounting principles.
[49 FR 30685, Aug. 1, 1984]
EDITORIAL NOTE: For FEDERAL REGISTER citations affecting § 701.21, see the List of CFR
Sections Affected, which appears in the
Finding Aids section of the printed volume
and at www.fdsys.gov.

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EFFECTIVE DATE NOTE: At 80 FR 66706, Oct.
29, 2015, § 701.21 was amended in paragraph
(h)(4)(iv) by removing ‘‘§ 702.2(f)’’ and adding
‘‘§ 702.2’’ in its place, effective Jan. 1, 2019.

§ 701.22 Loan participations.
This section applies only to loan participations as defined in paragraph (a)
of this section. It does not apply to the
purchase of an investment interest in a
pool of loans. This section establishes
the requirements a federally insured
credit union must satisfy to purchase a
participation in a loan. This section
applies only to a federally insured
credit union’s purchase of a loan participation where the borrower is not a
member of that credit union and where
a continuing contractual obligation between the seller and purchaser is contemplated. Generally, a federal credit
union’s purchase of all or part of a loan
made to one of its own members, subject to a limited exception for certain
well capitalized federal credit unions in
§ 701.23(b)(2), where no continuing contractual obligation between the seller
and purchaser is contemplated, is governed by § 701.23 of this part. Federally
insured, state-chartered credit unions
are required by § 741.225 of this chapter
to comply with the loan participation
requirements of this section. This section does not apply to corporate credit
unions, as that term is defined in § 704.2
of this chapter.
(a) For purposes of this section, the
following definitions apply:
Associated borrower means any other
person or entity with a shared ownership, investment, or other pecuniary
interest in a business or commercial
endeavor with the borrower. This
means any person or entity named as a
borrower or debtor in a loan or extension of credit, or any other person or
entity, such as a drawer, endorser, or
guarantor, engaged in a common enterprise with the borrower, or deriving a
direct benefit from the loan to the borrower. Exceptions to this definition for

partnerships, joint ventures and associations are as follows:
(1) If the borrower is a partnership,
joint venture or association, and the
other person with a shared ownership,
investment, or other pecuniary interest in a business or commercial endeavor with the borrower is a member
or partner of the borrower, and neither
a direct benefit nor a common enterprise exists, such other person is not an
associated borrower.
(2) If the borrower is a member or
partner of a partnership, joint venture,
or association, and the other entity
with a shared ownership, investment,
or other pecuniary interest in a business or commercial endeavor with the
borrower is the partnership, joint venture, or association and the borrower is
a limited partner of that other entity,
and by the terms of a partnership or
membership agreement valid under applicable law, the borrower is not held
generally liable for the debts or actions
of that other entity, such other entity
is not an associated borrower.
(3) If the borrower is a member or
partner of a partnership, joint venture,
or association, and the other person
with a shared ownership, investment,
or other pecuniary interest in a business or commercial endeavor with the
borrower is another member or partner
of the partnership, joint venture, or association, and neither a direct benefit
nor a common enterprise exists, such
other person is not an associated borrower.
Common enterprise means:
(1) The expected source of repayment
for each loan or extension of credit is
the same for each borrower and no individual borrower has another source
of income from which the loan (together with the borrower’s other obligations) may be fully repaid. An employer will not be treated as a source of
repayment because of wages and salaries paid to an employee, unless the
standards described in paragraph (2)
are met;
(2) Loans or extensions of credit are
made:
(i) To borrowers who are related directly or indirectly through common
control, including where one borrower
is directly or indirectly controlled by
another borrower; and

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National Credit Union Administration

§ 701.22

(ii) Substantial financial interdependence exists between or among
the borrowers. Substantial financial
interdependence means 50 percent or
more of one borrower’s gross receipts
or gross expenditures (on an annual
basis) are derived from transactions
with another borrower. Gross receipts
and expenditures include gross revenues or expenses, intercompany loans,
dividends, capital contributions, and
similar receipts or payments; or
(3) Separate borrowers obtain loans
or extensions of credit to acquire a
business enterprise of which those borrowers will own more than 50 percent
of the voting securities or voting interests.
Control means a person or entity directly or indirectly, or acting through
or together with one or more persons
or entities:
(1) Owns, controls, or has the power
to vote 25 percent or more of any class
of voting securities of another person
or entity;
(2) Controls, in any manner, the election of a majority of the directors,
trustees, or other persons exercising
similar functions of another person or
entity; or
(3) Has the power to exercise a controlling influence over the management or policies of another person or
entity.
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.
Direct benefit means the proceeds of a
loan or extension of credit to a borrower, or assets purchased with those
proceeds, that are transferred to another person or entity, other than in a
bona fide arm’s-length transaction
where the proceeds are used to acquire
property, goods, or services.
Eligible organization means a credit
union, credit union organization, or financial organization.
Financial organization means any federally chartered or federally insured financial institution; and any state or

federal government agency and its subdivisions.
Loan participation means a loan
where one or more eligible organizations participate pursuant to a written
agreement with the originating lender,
and the written agreement requires the
originating lender’s continuing participation throughout the life of the loan.
Originating lender means the participant with which the borrower initially
or originally contracts for a loan and
who, thereafter or concurrently with
the funding of the loan, sells participations to other lenders.
(b) A federally insured credit union
may purchase a participation interest
in a loan from an eligible organization
only if the loan is one the purchasing
credit union is empowered to grant and
the following additional conditions are
satisfied:
(1) The purchase complies with all
regulatory requirements to the same
extent as if the purchasing federally insured credit union had originated the
loan, including, for example, the loansto-one-borrower
provisions
in
§ 701.21(c)(5) of this part for federal
credit unions and § 723.8 of the member
business loans rule in part 723 of this
chapter for all federally insured credit
unions;
(2) The purchasing federally insured
credit union has executed a written
loan participation agreement with the
originating lender and the agreement
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

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§ 701.22

12 CFR Ch. VII (1–1–18 Edition)

(5) The purchase complies with the
purchasing federally insured credit
union’s internal written loan participation policy, which, at a minimum,
must:
(i) Establish underwriting standards
for loan participations;
(ii) Establish a limit on the aggregate amount of loan participations
that may be purchased from any one
originating lender, not to exceed the
greater of $5,000,000 or 100 percent of
the federally insured credit union’s net
worth, unless this amount is waived by
the appropriate regional director, and,
in the case of a federally insured, statechartered credit union, with prior written concurrence of the appropriate
state supervisory authority;
(iii) Establish limits on the amount
of loan participations that may be purchased by each loan type, not to exceed
a specified percentage of the federally
insured credit union’s net worth; and
(iv) Establish a limit on the aggregate amount of loan participations
that may be purchased with respect to
a single borrower, or group of associated borrowers, not to exceed 15 percent of the federally insured credit
union’s net worth, unless waived by the
appropriate regional director, and, in
the case of a federally insured, statechartered 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 calendar 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 request
the regional director to reconsider a

denied waiver request and/or file an appeal with the NCUA Board in accordance with the procedures set forth in
subpart B to part 746 of this chapter.
(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 other matters
involving the ongoing administration
of the loan; and

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National Credit Union Administration

§ 701.23

(vi) Circumstances and conditions
under which participants may replace
the servicer.

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[78 FR 37956, June 25, 2013, as amended at 81
FR 13553, Mar. 14, 2016; 82 FR 50291, Oct. 30,
2017]

§ 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.
(a) For purposes of this section:
(1) Eligible obligation means a loan or
group of loans.
(2) Student loan means a loan granted
to finance the borrower’s attendance at
an institution of higher education or at
a vocational school, which is secured
by and on which payment of the outstanding principal and interest has
been deferred in accordance with the
insurance or guarantee of the Federal
Government, of a State government, or
any agency of either.
(b) Purchase. (1) A Federal credit
union may purchase, in whole or in
part, within the limitations of the
board of directors’ written purchase
policies:
(i) Eligible obligations of its members, from any source, if either: (A)
They are loans it is empowered to
grant or (B) they are refinanced with
the consent of the borrowers, within 60
days after they are purchased, so that
they are loans it is empowered to
grant;
(ii) Eligible obligations of a liquidating credit union’s individual members, from the liquidating credit union;
(iii) Student loans, from any source,
if the purchaser is granting student
loans on an ongoing basis and if the
purchase will facilitate the purchasing
credit union’s packaging of a pool of

such loans to be sold or pledged on the
secondary market; and
(iv) Real estate-secured loans, from
any source, if the purchaser is granting
real estate-secured loans pursuant to
§ 701.21 on an ongoing basis and if the
purchase will facilitate the purchasing
credit union’s packaging of a pool of
such loans to be sold or pledged on the
secondary mortage market. A pool
must include a substantial portion of
the credit union’s members’ loans and
must be sold promptly.
(2) Purchase of obligations from a
FICU. A federal credit union that received a composite CAMEL rating of
‘‘1’’ or ‘‘2’’ for the last two (2) full examinations and maintained a net
worth classification of ‘‘well capitalized’’ under part 702 of this chapter for
the six (6) immediately preceding quarters or, if subject to a risk-based net
worth (RBNW) requirement under part
702 of this chapter, has remained ‘‘well
capitalized’’ for the six (6) immediately
preceding quarters after applying the
applicable RBNW requirement may
purchase and hold the following obligations, provided that it would be empowered to grant them:
(i) Eligible obligations. Eligible obligations without regard to whether they
are obligations of its members, provided they are purchased from a federally-insured credit union and the obligations are either:
(A) Loans the purchasing credit
union is empowered to grant; or
(B) Loans refinanced with the consent of the borrowers, within 60 days
after they are purchased, so that they
are loans the purchasing credit union
is empowered to grant;
(ii) Eligible obligations of a liquidating
credit union. Eligible obligations of a
liquidating credit union without regard
to whether they are obligations of the
liquidating credit union’s members.
(iii) Student loans. Student loans provided they are purchased from a federally-insured credit union only;
(iv) Real estate-secured loans. Real estate-secured loans provided they are
purchased from a federally-insured
credit union only;
(3) A Federal credit union may make
purchases in accordance with this paragraph (b), provided:

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