This document discusses the risks and liabilities of loan participations. It provides tips for originating lenders and participating credit unions to avoid risks, such as performing independent underwriting. Proposed regulatory changes may include limits on loan participations from a single originator or borrower. New regulations are predicted to require conforming underwriting standards and purchasing from eligible organizations.
1. Risks and Liabilities of
Loan Participations
Police Officer’s Credit Union
Conference
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2. E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3153
eakeeney@kaufcan.com
kau fC AN .com
3. Topics for Consideration
• Tips to Avoid Risk, Abuses & Potential
Liabilities of Loan Participations
• Some Contract Tips
• Proposed Regulatory Changes
• Crystal Ball Predictions on New Regulatory
Requirements
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5. Tips to Avoid Risks, Abuses &
Potential Liabilities of Loan
Participations
• Originating lender must manage the loan
relationship with same standard of care as it
would with any other loan it originates &
services
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6. Tips to Avoid Risks, Abuses &
Potential Liabilities of Loan
Participations (cont.)
• Participating credit union should
– Perform independent underwriting & risk analysis
as though originating & servicing the loan
themselves
– Evaluate the financial condition of the borrower
– Due diligence to see if the originating credit union
has the expertise & systems in place
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7. Tips to Avoid Risks, Abuses &
Potential Liabilities of Loan
Participations (cont.)
• Financial analysis of the credit unions
involved in the transaction
• With multiple lenders – well-written master
participation loan agreement
– Identification of the roles & responsibilities of all
parties involved
– Verification that all parties have performed
independent financial analysis
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8. Tips to Avoid Risks, Abuses &
Potential Liabilities of Loan
Participations (cont.)
• Requirement that each loan participant has
reviewed the loan documents prior to closing
• Identification of loans sold with & without
recourse
• Identification & due diligence regarding any
guarantors
• Servicing issues
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9. Tips to Avoid Risks, Abuses &
Potential Liabilities of Loan
Participations (cont.)
• Loan modification issues – DECISIONS
– Change in terms requiring what % of consent of
the loan participants – majority rules unanimous
consent
• Buy-back rights
• Attorney review of contract
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10. Some Contract Tips
• Form agreements since 2003
• Pre-printed form contracts
• Guarantor(s) information to be included in definition
of Loan Documents
• Servicer
– Defined/described
– (Due diligence)
– Any right to make loan modifications
– Fees & delinquencies
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11. Some Contract Tips (cont.)
• Privacy & Confidentiality
• Broker’s rights/responsibilities/payments
• Right to buy back
– For cause
– For convenience
• Representations & warranties
• Notification
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12. Some Contract Tips (cont.)
• Voting rights
• Custody of loan documents
• Separate trust accounts for funds
• Statutory liens
• Prepayment penalty
• Defaults
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13. Proposed Regulatory Changes
• Minimum standards
• Underwriting standards must be “same” as
underwriting standards buying credit union
utilizes
• Limit aggregate amount of loan participations
purchased from any 1 originating credit union
– not to exceed 25% of credit union’s net worth
– NCUA feedback
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14. Proposed Regulatory Changes
(cont.)
• Establish limits on amount of loan
participation
– by each loan type
– not to exceed a specified percentage of credit
union’s net worth
• Establish a limit on the aggregate amount of
loan participations to be purchased
– not to exceed 15% of credit union’s net worth
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15. Proposed Regulatory Changes
(cont.)
• Loan participation minimum standards
• Expansion to federally-insured state-
chartered credit unions
– Delinquency as of end of 2010
• 4.11% FISCU
• 3.74% FCU
– Legal authority for expansion?
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18. A ceiling of 25% of the purchasing credit union’s
net worth on loan participations from one
originator.
No waivers
NCUA’s preliminary response
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19. A limit of 15% of the purchasing credit union’s
net worth on loan participations from one
borrower
CRYSTAL BALL
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20. A requirement that federally-insured credit
unions that are selling loan participations must
retain a 10% interest in the loan originated
(FCUs already must meet this requirement)
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21. A requirement that loan participations would
have to conform to the same underwriting
standards that a federal credit union employs
when originating a loan
CRYSTAL BALL
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22. A requirement that loan participations be
purchased from an eligible organization
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23. E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3153
eakeeney@kaufcan.com
kau fC AN .com
24. Risks and Liabilities of
Loan Participations
Police Officer’s Credit Union
Conference
kau fC AN .com