When the loan participation regulation was amended in 2013, it stipulated that the originator (the lender whose paper the loans are written on) has to stay in the loan participation for the life of the loan and hold at least 10% of the principal amount if the originator is a federally chartered credit union and at least 5% if the originator is a CUSO, state-chartered credit union, or bank.
Credit unions have often participated in indirect loans assigned from third party retailers (i.e. car dealers). According to the August 10, 2015 NCUA Opinion Letter entitled “Loan Participations in Indirect Loans – Indirect Lender” from Michael J. McKenna, General Counsel of National Credit Union Administration (“NCUA”) (the “Letter”), credit unions selling participation interests in indirect loans can qualify as the originator of the indirect loan, which permits a federally insured credit union to purchase a participation interest from such credit union seller. Specifically, the Letter states that when a third party retailer is merely acting as an agent of the credit union and performs administrative functions as, essentially, an extension of the credit union’s lending operations (i.e. assisting the credit union to process the indirect loan), the third party retailer is acting more so as a facilitator to the credit union’s lending operations, as opposed to acting as a separate lender of the loan that generates the loan and then sells the loan to the credit union.
In addition, similarly to the NCUA’s treatment of indirect loans under its eligible obligations rule, the Letter states that a federal credit union may be involved in an indirect lending arrangement for the purposes of the loan participation rule under the credit union’s authority to make loans to its members so long as two conditions are met. First, the selling credit union must have made the final underwriting decision on the indirect loan, and second, the third party retailer must have assigned the loan or sales contract to the credit union very soon after it was signed by the borrower and the third party retailer.
Finally, the Letter states that the period of time that constitutes “very soon after” depends on the nature of the indirect loan and the practical realities of assigning certain kinds of loans when taking into consideration what is regarded as commercially reasonable given the marketplace and industry standards. However, the Letter did reiterate that it is NCUA’s longstanding position that the sooner the assignment is made, the more likely the third party retailer will be viewed as a loan facilitator, and not a loan originator.
If the above-stated conditions are met, then the credit union selling a participation interest in the indirect loan would qualify as the originator of the loan and, therefore, a federally insured credit union purchasing a participation interest from such credit union seller would be permitted to do so under the Letter.
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Revised September 6, 2017