Risks and Liabilities of Loan Participations, Part II
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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.
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Risks and Liabilities of Loan Participations, Part II
- 1. Risks and Liabilities of Loan Participations Police Officer’s Credit Union Conference kau fC AN .com
- 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 kau fC AN .com
- 4. kau fC AN .com
- 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 kau fC AN .com
- 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 kau fC AN .com
- 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 kau fC AN .com
- 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 kau fC AN .com
- 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 kau fC AN .com
- 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 kau fC AN .com
- 11. Some Contract Tips (cont.) • Privacy & Confidentiality • Broker’s rights/responsibilities/payments • Right to buy back – For cause – For convenience • Representations & warranties • Notification kau fC AN .com
- 12. Some Contract Tips (cont.) • Voting rights • Custody of loan documents • Separate trust accounts for funds • Statutory liens • Prepayment penalty • Defaults kau fC AN .com
- 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 kau fC AN .com
- 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 kau fC AN .com
- 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? kau fC AN .com
- 16. Crystal Ball Projections Regarding New Regulations kau fC AN .com
- 17. kau fC AN .com
- 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 kau fC AN .com
- 19. A limit of 15% of the purchasing credit union’s net worth on loan participations from one borrower CRYSTAL BALL kau fC AN .com
- 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) kau fC AN .com
- 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 kau fC AN .com
- 22. A requirement that loan participations be purchased from an eligible organization kau fC AN .com
- 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