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Loan Participations - Andy Keeney

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Andy Keeney's presentations on loan participations during the Executive Track of the 9th Annual Police Officers' Credit Union Conference.

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Loan Participations - Andy Keeney

  1. 1. kaufCAN.com Police Officer’s Credit Union Conference June 2012 E. Andrew Keeney, Esq.Your only criteria for selecting a law firm should be itscommitment to do all the right things to help you succeed.We can. And we will.
  2. 2. E. Andrew Keeney Partner T (757) 624.3153 F (757) 624.3169 eakeeney@kaufcan.comAndy currently serves as the General Counsel for numerous credit unions, he is an approved andpreferred special counsel for several credit union insurance companies and has been a speciallyretained attorney by NCUA. Additionally, Andy’s practice involves a range of commercial real estateservices from zoning to representation provided in connection with the leasing or purchase and/orsale of commercial real estate. His finance experience includes real estate development activitiesand workouts of troubled loans.practice areas • Lender Representation • Real Estate Strategies • Commercialrepresentative matters • Retained general counsel for ABNB Federal Credit Union, Credit Union Auto Loan Network (CUALN), Justice Federal Credit Union, Congressional Federal Credit Union, Educational System Federal Credit Union, BayPort Credit Union, Belvoir Federal Credit Union and many other credit unions • Achieved as agent for the applicant rezoning in a controversial application for Wal-Mart and Sam’s Club in Chesapeake, Virginia • Obtained rezoning for Franciscus Company in the first age-restricted community in Chesapeake, Virginia • Regional counsel for Southeastern Property Development of Birmingham, Alabama • Obtained special zoning counsel for Wood Partners and the Alta Great Bridge, Alta Reserve and Streets of Greenbrier developments • Regional counsel for Bonaventure Realty Group, a widely-respected multi-family residential developerrecognition and honors • Who’s Who Attorneys in the East, 1996-present • Virginia Super Lawyers; Law & Politics, 2006 • Who’s Who in America’s Credit Unions, 2008 • Virginia Bar Association Community Servant Awards, 2006-present • National Leadership Award, 2003 • American College of Mortgage Attorneys, 1994-present; Board of Regents, 2007-present • Community Service Award, Currituck County Board of Commissioners150 West Main Street, Suite 2100 Norfolk, VA 23510 kaufCAN.com T (757) 624.3000 F (757) 624.3169 1 of 3
  3. 3. associations • American Bar Association • Virginia Bar Association • District of Columbia Bar Association • American College of Mortgage Attorneys • North Carolina Bar Association • American Bar Association; Committee on Credit Unions; Charter Member • Old Dominion University Center for Real Estate and Economic Development; Executive Committee and Advisory Board • Fairfax County Board of Equalization; Vice Chairman, 1992-1993 • Urban Land Institute; District Council for Hampton Roads, Executive Committee • Civic Leadership, 2000-2001 • Boys and Girls Club of South Hampton Roads; Board of Directors, 2001-2008 • Virginia Chapter of American Planning Association • Langley Federal Credit Union; Board of Directors, 2006 -2008 • Dare County Board of Adjustment (Alternate) • Whalehead Preservation Board, 1997–2004education • Drew University; B.A., 1973 • American University Washington College of Law; J.D., 1976press and publication • Credit Union Legal Update - Spring 2012 • “New FASB Guidance Helps to Clarify TDR Accounting,” CFO Focus: Hot Examination Issue, Union Management, July 2011 Credit • Credit Union Legal Update - Summer 2011 • Credit Union Legal Update - Spring 2011 • “Legal Eagle” Addendum • Mortgage Delinquency & Collections Conference, 2010 • Credit Union Legal Update - Spring 2010 • Glossary of Real Estate Terms • E. Andrew Keeney Re-elected to Board of Regents for the American College of Mortgage Attorneys • Credit Union Legal Update - Fall 2009 • Credit Union Legal Update - Winter 2009 • Credit Union Legal Update - Summer 2008 • Credit Union Legal Update - Winter 2008 • Credit Union Legal Update - Summer 2007 • Credit Union Legal Update - Winter 2007 • Critical Real Estate Issues for Credit Unions • 28 Kaufman & Canoles Attorneys Named in Virginia Super Lawyers 2006 • Credit Union Legal Update - Spring 2006 • Credit Union Legal Update - Fall 2005 • Credit Union Legal Update - Spring 2005 • Credit Union Legal Update - Fall 2004 • Credit Union Legal Update - Summer 2004 • Credit Union Legal Update - Autumn 2001-present • “Cybersquatters Infringe on Local Financial Institutions,” Inside Business, March 31, 2008, April 6, 2008 • “Updating Member Credit Data,” On Compliance, CUES, February 28, 2008 • Federal Credit Union Newsletter - Spring 2001 • Presenter on major land use laws in Virginia for National Business Institute150 West Main Street, Suite 2100 Norfolk, VA 23510 kaufCAN.com T (757) 624.3000 F (757) 624.3169 2 of 3
  4. 4. press and publication (continued) • Presenter on zoning and land use for Lorman Educational Services • Black’s Guide Board of Advisors • Black’s Guide Glossary of Real Estate Terms, 1996, 1997 & 1998 • “What Happens When a Board Member Resigns?,” Martindale, July 24, 2006 • Presenter on internet pirating to Virginia Credit Union League, Hampton, Tidewater, and Richmond Chapters • Critical Real Estate Issues for Credit Unions – Virginia Credit Union League, 2007 • Let’s Make a Deal: Managing Your Real Estate Portfolio - Maryland D.C. Credit Union Association, 2009 150 West Main Street, Suite 2100 Norfolk, VA 23510 kaufCAN.com T (757) 624.3000 F (757) 624.3169 3 of 3
  5. 5. CREDIT UNION LEGAL UPDATE spring 2012Credit Union Mergers vs. Compliance Considerations: An OxymoronIn today’s economic climate, all credit unions are well advised to stay flexible and seek every opportunity to achieve successin these difficult financial times. With ever increasing operating and compliance costs, coupled with significantly decreasedmember fee income, credit unions considering a merger must be on the alert for the short-term, as well as long-term, impactof the ever-changing world of consumer compliance rules and regulations.Unfortunately, many credit unions tend to view a potential merger opportunity as a sign of weakness or an indication that thecredit union has given up on its mission and its members. To the contrary, quite often a credit union merger, and even theinitial discussions with a potential merger partner, represent a well-intended forward thinking and long-term strategic plan andapproach. Often a struggling credit union will face a tough reality – if the struggling credit union stays on its present coursewithout any remedial action, member service will ultimately suffer. When member service begins to suffer, the membersbegin to migrate away from the credit union, seeking more stability and better customer service. No credit union wants to losemembers, and in the current economic climate, very few credit unions can afford to lose members.PRE-MERGER CONSIDERATIONSCredit union mergers generally fall into one of two categories. The first is a forced merger that is regulatory in nature and isdriven by the credit union’s regulatory agency.The second type of merger, and the type of merger that will be the focus of the remainder of this article, is a voluntary,strategic merger between two willing credit unions. They desire to pool and merge resources to achieve certain efficiencieswith the goal of achieving the ability to provide optimal member service to the collective membership base of the two mergingcredit unions.The benefits of a merger are well documented and include the ability of the surviving entity to take advantage of economiesof scale, administrative and management consolidation, regulatory compliance efficiencies, and other advantages that comealong with a larger membership base. If a credit union is struggling financially, finding a larger, more stable merger partner inwhich to merge the credit union can be an attractive methodology for achieving the goal of long-term health of the creditunion and its members. This should not be viewed as a failure or a disappointment to the members. Instead, it can andshould be presented to the existing membership base in a positive light, as a strategic business decision to reposition thecredit union and its members for long-term viability and sustainable success over the long term.Credit union mergers can also provide for a valuable succession planning tool. For a credit union led by a Chief ExecutiveOfficer with plans to retire in the near future, but without a clear succession plan in place in terms of the credit union’s next-in-line to become CEO, a potential merger with another credit union that has strong leadership and a well-positioned CEO maybe the best option.Regardless of the reason for a merger, it is worth noting that the merger process is something that takes planning,forethought and a good bit of courting between the two potential merger partner credit unions. Typically, the discussions andpreliminary negotiations take place between the CEOs of the potential merger partner credit unions or the CEOs andrespective Chairmen of their Boards. At this preliminary stage, the two potential merger partners need to get a sense of each
  6. 6. other’s philosophies, core and fundamental beliefs, and strategy for success going forward. There are no rules or regulationsthat would specify how long the courtship period between two potentially interested credit union merger partners should last.These courtships can last for six months or even two years (or more) depending on the situation and the process, and eitheris perfectly normal.Once the CEOs of the potential credit union partners have agreed in principal that they would be willing to merge the entities,the next major step is taking the concept and preliminary details of the proposed merger plan to the respective credit unions’Boards of Directors. This process can also be time consuming. It will require education of each Board such that each is fullyapprised of the motives and objectives behind the potential merger and the expected benefits and efficiencies that will result.A thorough presentation to the Board by the credit union’s senior management team is a must.Once each respective credit union has "kicked the tires" of the other potential merger partner credit union and each aresatisfied with the results of such due diligence inquiries, the parties then must adhere to and obtain preliminary regulatoryapproval from the applicable regulatory agency or agencies. Depending on the structure of the two merging credit unions (i.e.whether they are both federally-chartered credit unions or if one is a federally-chartered credit union and the other a state-chartered credit union), the rules are slightly different. Preliminary regulatory approval is the precursor to taking the potentialmerger to a vote of the members. Often a major undertaking based on the size of the merging credit unions, the member voteis essential. Much like the initial presentation to the Board, the presentation to the members must be strategic and centeredon the positive and beneficial nature of the intended and expected results of the merger. Without the requisite memberapproval vote, the merger is dead in the water. Finally, once the members have voted to approve the merger, the respectiveBoards of the merging credit unions may begin to integrate and initiate strategic long-term plans and decisions, and must alsoobtain final regulatory approval.The NCUA (for federally-chartered credit unions) publishes a Credit Union Merger and Conversion Manual that walks a creditunion through the regulatory process and requirements for consummation of a credit union merger. The document isavailable by clicking here. It provides a valuable resource to credit unions that are exploring a potential merger and/or movingforward with merger discussions and negotiations. The guide provides useful forms for credit unions to utilize as theynavigate the merger landscape. Of course, the involvement of experienced advisors, including attorneys, accountants, andother business advisors, who understand and have worked with credit unions, but that also have experience in mergers andacquisitions, is a must. The guide is a useful tool and the forms provided by NCUA are helpful. Nothing replaces the expertiseand insight of professional advisors who understand both the credit union industry and who also understand the complexitiesassociate with mergers and the post-merger consummation.As noted above, due diligence is key. A comprehensive due diligence phase will include a look at every aspect of the otherpotential merger candidate, from contracts to personnel, from management philosophy to dividend policies, from branchlocations to electronic member service lines. Each credit union will want to obtain as clear a picture as possible with respectto the health, status and direction of its potential merger partner.As one of the major due diligence items, the surviving credit union will want to complete a thorough analysis of the potentialmerging credit union’s open-end lending portfolio. This would include all open-end loans, including without limitation creditcard portfolios, home equity line portfolios, and the status of the other credit unions open-end lending program, if any.The credit union must be sure, prior to assuming them pursuant to the merger, that such open-end loans and lines of credit inits merger partner’s portfolio are acceptable to the acquiring or surviving credit union. Once the merger plan is executed andfinalized, the surviving credit union inherits and assumes the assets and liabilities of the non-surviving credit union. Thus, it isimperative to note the health, past performance, and future prospects for such open-end lending platforms.To focus on the credit card portfolio, the surviving credit union needs to get itself comfortable with the existing credit cardportfolio. This includes the rates, the credit tiers used to establish risk-based rates, etc., with respect to the non-survivingcredit union’s portfolio that would be assumed pursuant to the merger. In merging with another credit union, should thesurviving credit union determine that it desires to increase the annual percentage rates on the credit cards assumed from thenon-surviving credit union pursuant to the merger, the change in annual percentage rate would be considered a significantchange in terms. The surviving credit union would be required to send a change in terms notice to each member affected bythe increase in APR. Regulation Z requires forty-five days’ advance notice to the member of an increase in the annualpercentage rate. In addition, the member would then have the option to reject the "significant change in terms" to their creditcard and opt instead of accepting the increase to reject the change, close their credit card account, and repay it on its thencurrent terms.
  7. 7. Clearly, the surviving credit union would face a difficult business decision if it were to assume an underperforming credit cardportfolio. One the one hand, the credit union can always decide to increase rates on its credit card products in accordancewith the procedures set forth in Regulation Z, but any such decision would have to be tempered by and weighed against thepotential loss of credit card business and volume due to member backlash and outcry against such increases in rates fromthe "new" credit union.Another important area for the due diligence inquiry will be third-party vendor contracts. All third-party vendor contracts willneed to be reviewed thoroughly to determine which vendors will be retained by the surviving credit union. In many instances,where the two merging credit unions have contracts with two separate vendors for the same service (for example, a checkprinting service), the surviving entity will need to make a determination as to which vendor to retain and which to part wayswith. Typically, the surviving credit union will want to maintain its current vendor relationship, but this is not always the case.If, during the due diligence process, the surviving credit union determines that the non-surviving credit union has a betterthird-party vendor arrangement, this may give the surviving credit union additional motivation to consummate the merger. Thefocus would then turn to a review of the surviving credit union’s vendor contract to determine how it may be terminated. Incalculating the costs and expenses involved in the overall merger process, the due diligence review of vendor contracts willbe critical, as some contracts will require early termination fees, while others will contain provisions that set pricing terms onthe number of members of the credit union.Similarly, the surviving credit union, prior to assuming and taking on a mortgage loan portfolio of its merger partner, mustperform a thorough analysis of the target credit union’s existing mortgage loan portfolio. If mortgage lending is something thatthe surviving credit union is actively engaged in and relies on as a revenue-producing segment of the credit union, then thesurviving credit union needs to ensure that it will be assuming a healthy and profitable, well-performing mortgage portfolio.Relevant to the inquiry is whether the target credit union originates, funds and services its own mortgage loans in its ownportfolio or whether the target credit union outsources these functions or sells its mortgage loans on the secondary market. Ifa third party services the mortgage loans, does the target credit union have a right to buy back those servicing rights suchthat the surviving credit union may be able to purchase the right to add such loans back into the credit union’s portfolio inorder to realize profits from the same? Regardless of the status of the mortgage lending portfolio, the surviving credit unionduring the due diligence process needs to become familiar with the target credit union’s mortgage lending practices, and theoverall "fit" of the target credit union’s mortgage loan portfolio into the surviving credit union’s existing mortgage loan programand portfolio. With the bevy of recent regulatory changes to the requirements for loan modifications, the costs, time andresources involved in modifying mortgage loans has increased to heightened levels. For all intents and purposes, after amerger the surviving credit union cannot, from a practical perspective, assume an underperforming mortgage loan portfoliowith the intent to go in and modify the terms of the existing mortgage loans to align with the surviving credit union’s mortgageloans.POST-MERGER CONSIDERATIONSOften overlooked, but vitally important to a financial impact analysis of a potential merger, is the existence of such springingclauses that would operate to increase the fees due to a third-party vendor based on membership size. Take a coreprocessor vendor contract that is priced based on membership size. The surviving credit union may be paying, by way ofexample only, $2,000 a month for the third-party service, but that pricing may be based on a membership base of 25,000members. Once that credit union merges with another credit union comprised of 20,000 members, the credit union couldconceivably see a marked increase in the fees charged by the third-party vendor based on the new membership total of45,000 members. These types of inquiries are essential during the due diligence process and should be completed by, or atminimum should involve, professional advisors with experience in these matters, who can identify the issues and providesound advice with respect to potential pitfalls in the merger process as it relates to integrating third-party vendor services forthe surviving, merged credit union.As mentioned above, this article cannot possibly cover all aspects of pre- or post-mergers. For the reasons discussed above,credit unions considering a merger should always consult qualified advisors and an attorney who can walk the credit unionthrough the process, including the regulatory framework and the logistics of a full-blown due diligence review of the potentialmerger partner. Back to top
  8. 8. E. Andrew Keeney Partner T (757) 624.3153 F (757) 624.3169 eakeeney@kaufcan.comE. Andrew Keeney, a partner with Kaufman & Canoles, is the editor of the Credit Union Legal Update. Andy has beencommitted to the representation of credit unions for over three decades. In addition to serving as the in-house attorney for theState Department Federal Credit Union and the Pentagon Federal Credit Union, he has represented many credit unions,leagues and associations, as well as the NCUA. Andy would like to acknowledge Aaron J. Ambrose, an associate withKaufman & Canoles, for his contributions to this publication.The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinionon specific facts and circumstances. To be removed from this mailing list, please click here. Copyright © 2012. Kaufman & Canoles. kaufCAN.com CREDIT UNION LEGAL UPDATE spring 2012
  9. 9. Risks and Liabilities of Loan ParticipationsPolice Officer’s Credit Union Conference kaufCAN.com
  10. 10. E. Andrew Keeney, Esq.Kaufman & Canoles, P.C.150 West Main Street, Suite 2100Norfolk, VA 23510(757) 624-3153eakeeney@kaufcan.com kaufCAN.com
  11. 11. Topics for Consideration• Definitions and Requirements of Loan Participations• Due Diligence Items and Checklists• Contract Issues and Checklists• Tips to Avoid Risks, Abuses and Potential Liabilities of Loan Participations kaufCAN.com
  12. 12. Participated loan relationships are co-lendingarrangements in which the originating lendersells an interest in the loan to the participant. kaufCAN.com
  13. 13. GROWTH!!!• As of June 2011 – 1,432 FICU’s reported loan participation loans with total balances of $12.8 billion – Since 2007 31% increase – up from $9.7 billion kaufCAN.com
  14. 14. kaufCAN.com
  15. 15. kaufCAN.com
  16. 16. What is a Loan Participation?• Defined by federal regulation as a “loan where one or more eligible organizations participates pursuant to a written agreement with the originating lender.”• Essentially a loan made by one or more credit unions to a single borrower and is typically accomplished by an originating credit union selling a portion of a loan to a second credit union. kaufCAN.com
  17. 17. General Risks and Benefits• Degree of risk varies based on whether credit union is seller or buyer• Sale is with recourse or non-recourse• The size and complexity of individual loans• Level of experience and expertise on both sides• External economic factors kaufCAN.com
  18. 18. Benefits of Loan Participations to Seller• Increase liquidity• Increase ability to serve members since participating lenders can extend loans for higher amounts• Mechanism to manage interest rates• Manage credit and geographic concentration risks kaufCAN.com
  19. 19. Benefits of Loan Participations to the Buying Credit Union• Diversified balance sheet• Use of excess liquidity• Increasing revenue kaufCAN.com
  20. 20. Risks of Loan Participations to Selling Credit Union• Regulatory compliance• Full disclosure• Credit administration kaufCAN.com
  21. 21. Risks of Loan Participations to Buying Credit Union• Risk assessment• Strategic planning• Due diligence• Contracts and legal review• Underwriting credit risks• Internal controls kaufCAN.com
  22. 22. NCUA Rules and Regulations 12 CFR § 701.22• Organizations eligible to participate in loan participations are: – federal or state-chartered credit unions – CUSOs – any federally-chartered or federally-insured financial institution• Amount regulated by NCUA: – no amount specifically identified for a federal credit union – no federal credit union shall obtain an interest participation loan if some of that interest and other indebtedness exceeds 10% of the federal credit union’s unimpaired capital or surplus kaufCAN.com
  23. 23. Other NCUA LimitationsA federal credit union originating lender must:• originate loans only to its members• retain an interest of at least 10% on the face amount of each loan (no reference to recourse or non-recourse)• retain the original or copies of the loan documents• require the credit committee or loan officer to use the same underwriting standards for participation loans as other loans underwritten and approved at the credit unionA written master participation agreement kaufCAN.com
  24. 24. Other LimitationsA participating federal credit union that is notan originating lender shall:• participate only in loans it is empowered to grant• adopt a board-authorized participation policy setting forth loan underwriting standards prior to entering into a participation• participate in participation loans only if made to its own members or members of another participating credit union• retain original copies of participation agreement and a schedule of all covered loans; and• obtain approval of Board of Directors or ALCO kaufCAN.com
  25. 25. Other Limitations (cont.)A risk assessment and due diligence shall beperformed prior to entering into any third-partyarrangement.This is a mandatory requirement regardless ofwhether or not the other party is a credit unionor a CUSO. kaufCAN.com
  26. 26. Related Provisions• Prepayment penalties for a federal credit union cannot be collected (12 USC § 1757(5)(A)(viii))• Buying credit unions may only participate in loans in which the original lender remains a participant (Office of General Counsel Opinion 07-1035) kaufCAN.com
  27. 27. NCUA Examiners’ Warnings (from NCUA Examiners Guide, Chapter 10, Part 2)Examples of Unsafe and Unsound OperatingPolicies and Procedures in Loan Participations:• Purchase of loans without investigation of borrowers’ credit positions, the condition of the security or the property and the adequacy of appraisal reports• Purchase of unacceptably high-risk loans to obtain purchase discounts or net yields above current market averages• Sales of high-yield loans and replacement of these loans with lower-yield loans kaufCAN.com
  28. 28. NCUA Examiners’ Warnings (cont.)• Sales of loans at a time when no current or projected demand for loanable funds exists• Participation sales only for creating income from a yield differential of particularly risky practice under the conditions described immediately above kaufCAN.com
  29. 29. Due Diligence Items/Checklists• Inspection of property/In person• Review and analysis of appraisal• Environmental assessment• Likelihood of resale• Guarantors• Loan servicer• NCUA regulations & guidelines – Section 701.22 – NCUA Letter No. 08-CU-26 kaufCAN.com
  30. 30. Contract Issues/Checklists• Loan servicer rights• Representations & warranties – Underwriting policies – Collection procedures – Review of loan documentation• Notice provisions• Attorney review of contract kaufCAN.com
  31. 31. War Stories & Examples kaufCAN.com
  32. 32. Other Guidance• Supervisory NCUA Letter 08-CU026 – Evaluating Loan Participation Programs• NCUA Examiner’s Guide – Chapter 10, Pages 10A- 34 (participation loan & impermissible policies & practices)• NCUA Letter to Credit Unions 07-CU-13 – Evaluating Third Party Relationships• NCUA AIRES Questionnaire – Loan Participations kaufCAN.com
  33. 33. Please return for the next session: Roadblocks to Avoid Risks,Abuses & Potential Liabilities of Loan Participations kaufCAN.com
  34. 34. E. Andrew Keeney, Esq.Kaufman & Canoles, P.C.150 West Main Street, Suite 2100Norfolk, VA 23510(757) 624-3153eakeeney@kaufcan.com kaufCAN.com
  35. 35. Risks and Liabilities of Loan ParticipationsPolice Officer’s Credit Union Conference kaufCAN.com
  36. 36. Risks and Liabilities of Loan ParticipationsPolice Officer’s Credit Union Conference kaufCAN.com
  37. 37. E. Andrew Keeney, Esq.Kaufman & Canoles, P.C.150 West Main Street, Suite 2100Norfolk, VA 23510(757) 624-3153eakeeney@kaufcan.com kaufCAN.com
  38. 38. 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 kaufCAN.com
  39. 39. kaufCAN.com
  40. 40. 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 kaufCAN.com
  41. 41. 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 kaufCAN.com
  42. 42. 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 kaufCAN.com
  43. 43. 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 kaufCAN.com
  44. 44. 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 kaufCAN.com
  45. 45. 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 kaufCAN.com
  46. 46. Some Contract Tips (cont.)• Privacy & Confidentiality• Broker’s rights/responsibilities/payments• Right to buy back – For cause – For convenience• Representations & warranties• Notification kaufCAN.com
  47. 47. Some Contract Tips (cont.)• Voting rights• Custody of loan documents• Separate trust accounts for funds• Statutory liens• Prepayment penalty• Defaults kaufCAN.com
  48. 48. 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 kaufCAN.com
  49. 49. 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 kaufCAN.com
  50. 50. 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? kaufCAN.com
  51. 51. Crystal Ball ProjectionsRegarding New Regulations kaufCAN.com
  52. 52. kaufCAN.com
  53. 53. A ceiling of 25% of the purchasing credit union’snet worth on loan participations from oneoriginator.No waiversNCUA’s preliminary response kaufCAN.com
  54. 54. A limit of 15% of the purchasing credit union’snet worth on loan participations from oneborrower CRYSTAL BALL kaufCAN.com
  55. 55. A requirement that federally-insured creditunions that are selling loan participations mustretain a 10% interest in the loan originated(FCUs already must meet this requirement) kaufCAN.com
  56. 56. A requirement that loan participations wouldhave to conform to the same underwritingstandards that a federal credit union employswhen originating a loan CRYSTAL BALL kaufCAN.com
  57. 57. A requirement that loan participations bepurchased from an eligible organization kaufCAN.com
  58. 58. E. Andrew Keeney, Esq.Kaufman & Canoles, P.C.150 West Main Street, Suite 2100Norfolk, VA 23510(757) 624-3153eakeeney@kaufcan.com kaufCAN.com
  59. 59. Risks and Liabilities of Loan ParticipationsPolice Officer’s Credit Union Conference kaufCAN.com

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