NCUA Clarifies Origin of Loan Participations, Explains Who Benefits from Share Insurance Coverage on Trust Accounts

ALEXANDRIA, Va. – NCUA recently clarified that in order for federal credit unions to engage in a loan participation, the borrower must be a member and the loan must meet certain requirements. Inland Employees FCU wrote to NCUA asking for permission to participate in a bank’s indirect automobile lending program by purchasing a 100% interest in automobile loans originated by the bank and made to individuals who are not members of the FCU. In a July 1 response, NCUA Sheila Albin Associate General Counsel said “an FCU cannot participate in the program because the purchase is not a permissible loan participation or permissible purchase of an eligible obligation” and it “cannot purchase automobile loans originated by a bank unless the loans are to its members.” Inland Employees FCU had signed a contract to purchase a minimum of $500,000 per month in loans made by a bank located approximately fifty miles from its offices. The credit union indicated that, “more than likely” the borrowers are not eligible for membership. The contract also calls for purchasing 100% of the loans, without recourse, with the bank retaining the servicing rights. While the credit union considered the loans to be a sound investment, NCUA said regulations permit a FCU to purchase loans from any source, provided the borrower is a member and the loan is either of a type the FCU is empowered to grant or the loan is refinanced by the FCU within 60 days of its purchase. 12 C.F.R. 701.23(b)(1)(i). The rule imposes other restrictions as well, including an aggregate limitation on the amount of loans that may be purchased. 12 C.F.R. 701.23(b)(3). The rule makes exceptions on certain types of loans from these requirements, for example, where the seller is a liquidating credit union or for student loans or real estate loans if the purchase will facilitate an FCU’s sale of a pool of such loans in the secondary market. 12 C.F.R. 701.23(b)(1)(ii) – (iv). “As these exceptions are not applicable here, and the borrowers are not members of your credit union, the purchase is prohibited 701.23,” NCUA wrote. Because the credit union’s contract with the bank calls for the purchase of 100% of the loans, NCUA does not view the transaction as a loan participation. “Even if it were governed by NCUA’s loan participation rule, however, the transaction would not be permissible. Our rule requires, among other things, that an FCU may participate in a loan only if it is made to one of its own members, or to someone who is a member of another credit union that is also participating in the transaction. 12 C.F.R. 701.22(d)(2). Under the facts you have presented, the loans will not meet this requirement.” Inland Employees FCU asked if the contract between it and the bank can or should be voided. NCUA said the contract is not in compliance with its regulation, and the credit union must take steps to extricate itself from its obligations, recommending it consult with personnel in the regulator’s Atlanta regional office and with private counsel involving questions of state law. “You have also asked if NCUA can waive these requirements,” NCUA wrote. “Certain well-capitalized FCUs are exempt from some of the restrictions contained in the rule, but only where the purchase is from a federally insured credit union. 12 C.F.R. 742.5.” NCUA also offered guidance on a matter involving share insurance coverage for living trust accounts. GFA Federal Credit Union recently asked about the extent of NCUA share insurance coverage for funds held in two accounts established by a member in connection with a living trust in which the account owner’s son and daughter are beneficiaries In a June 30 opinion letter, NCUA wrote that in accordance with share insurance rules, the interests of the son and the daughter are each insured up to $100,000, separate from any individual accounts of the member or the beneficiaries, for a total of up to $200,000. GFA FCU also indicated that the interest of each beneficiary is equal. For insurance purposes, because the two accounts are maintained by the same individual for the same beneficiaries, the interests of the beneficiaries are aggregated and insured to $100,000 as to each beneficiary. 12 C.F.R. Appendix, 745 B. Because there are only two qualifying beneficiaries, the accounts are insured to $200,000 in the aggregate. Any balance over that amount is uninsured. Even though neither the son nor the daughter are credit union members, share insurance is available for the interests of qualifying beneficiaries in revocable trust accounts even if they are not credit union members. 12 C.F.R. 745.4(b). On the death of the account owner, the daughter is entitled to her 50% interest outright, whereas the son’s interest is to be held in trust for him until he reaches age fifty, GFA FCU wrote. After the death of the father, the son’s trust interest becomes irrevocable. “The interest would still be insurable, separate from any individual accounts owned by the trustee or the son. 12 C.F.R. 745.9-1(b),” NCUA wrote. “In order for the credit union to maintain a trust account for the son under those circumstances, however, the son would need to become a credit union member. Under our rules, either the settlor or the beneficiary of an irrevocable trust must be a member of the credit union. 12 C.F.R. Appendix 745 G. Since the death of the father (settlor) terminates his membership, the son would need to become a member, or the credit union would not be permitted to maintain the account.” [email protected]