April 27, 1998
Walter H. Hotz, Esquire
Hotz & Associates, P.C.
1979 Lakeside Parkway, Suite 200
Tucker, Georgia 30084
Dear Mr. Hotz:
You have written asking about the legality of a relationship between
a large and small federal credit union (FCU) as it relates to
the funding and purchasing of loans. As explained below, we believe
the relationship is impermissible.
Funding of Loans
You have described the following scenario: A small FCU does not
have the funds available at the time a loan is closing to fund
the loan. A large FCU funds the loan. The loan closes in the
name of the small FCU and the large FCU immediately purchases
the loan. You state that in the commercial world, the transaction
is characterized as a closing and simultaneous purchase. Region
III states that the large FCU is funding the loan. Although we
agree, that the transaction is a closing and simultaneous purchase,
we also believe that the large FCU is funding and then purchasing
the loan. In order for the transaction to be permissible, the
large FCU must be in compliance with NCUA's regulation governing
the purchase of eligible obligations. 12 C.F.R. �1.23(b).
The legal requirements of this provision are set forth below
in the discussion of "purchase of eligible obligations."
Since the large FCU is funding the loan due to liquidity problems
of the small credit union, the FCUs may want to consider entering
into a loan participation agreement. You should review �1.22
of NCUA's Regulations for the legal requirements of a loan participation
agreement. 12 C.F.R. �1.22.
Purchase of Eligible Obligations
Your second question is whether a credit union that purchases
nonmember loans must immediately move the loan into the secondary
market. NCUA's regulation permits an FCU to purchase real estate
secured loans, from any source, if the purchaser is granting such
loans on an ongoing basis and if the purchase will facilitate
the purchasing credit union's packaging of a pool of such loans
to be sold or pledged on the secondary mortgage market. 12 C.F.R.
�1.23(b)(1)(iv). The attached letter from Richard S. Schulman
to L.R. Dugan, dated May 26, 1995, citing the preamble to the
rule, explains that FCUs will be expected to sell loans promptly
and that arrangements to dispose of the loans should be made in
advance of the purchase.
In addition, the attached �30.4 of NCUA's Accounting Manual
requires FCUs to make arrangements "in advance of the purchase
date, by obtaining a commitment from a buyer, to purchase the
pool of loans before it is actually packaged." From your
description of the transaction, it does not appear that the FCU
is complying with the requirement that arrangements to sell the
loans be made prior to the purchase of the loans.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/MFR:bhs
SSIC 3500
97-1252
Enclosure
cc: Steven Dennison, Region III