NCUA General Counsel Michael McKenna recently issued a legal opinion letter from the agency on loan participations. An inquiry was made about whether a loan participation must meet the requirements of NCUA’s loan participations regulation throughout the life of the transaction.
“Yes, certain provisions of the loan participation must be met throughout the life of the transaction,” McKenna wrote.
McKenna said the answer is yes as well. Section 701.22(d)(4) requires a loan participation agreement to identify each participated loan, enumerate servicing responsibilities for that loan, and include disclosure requirements regarding the ongoing financial condition of that loan, the borrower and the servicer.
“These requirements support the underlying principle that the purchase or sale of a loan participation represents an interest in a single loan. This principle must be maintained throughout the life of a participated loan, including servicing,” McKenna writes. “Therefore, a servicer generally cannot deduct a servicing fee related to a nonperforming loan participation from the principal and interest received from a performing loan participation, even when many loan participations are sold to the same purchasing credit union.”
He also notes that NCUA’s loan participation regulation does not prohibit servicing practices that may make administering multiple loan participations more efficient.
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