Industry Letter  Participation authority for credit unions

Date:	10/02/2014
Referenced Sources:	M.G.L. c. 171 s. 65E

To The Chief Executive Officer Addressed:

The Division of Banks (Division) is issuing this letter in response to requests to clarify the authority for state-chartered credit unions to enter into loan participations.

Two main questions relative to participation authority have been raised to the Division:

1. One question is whether a state-chartered credit union may participate in loans made by other financial institutions, both credit unions and non-credit unions, to borrowers who do not meet the participating credit union’s field of membership requirements (referred to hereafter as a membership nexus or membership requirements).   At issue is the legal authority for a state-chartered credit union to enter into loan participations under G.L. c. 171, §65E(3) (Section 65E(3)). 
2. Another question is whether there are any approval requirements through the Division to exercise this authority under the so-called Parity Regulation. This letter also sets forth information about the alternate loan participation authority under the Division’s Parity Regulation.

Statutory authority

• Massachusetts General Laws

Chapter 454 of the Acts of 2008 (Chapter 454) rewrote sections 65 and 66 of chapter 171 of the Massachusetts General Laws, governing real estate mortgage loans by state-chartered credit unions.  Section 65 was replaced with six new sections, sections 65 through 65E, inclusive.  G.L. c. 171, § 65A sets forth provisions relative to loan policies at sections 65A(g) through (i), inclusive.

• Definition of “Loan” and “Mortgage Loan”

Section 65 of chapter 171 includes the following two definitions:

The word “loan” is defined as “a loan or line of credit, whether secured by collateral or security of any nature or unsecured, for consumer or other purposes other than a real estate loan.” (Emphasis added.)  The term “mortgage loan” is defined as “a loan, line of credit, or borrowing secured primarily by a lien on an interest in real estate, with the exception of a loan described in subsection (c) of section 65A.” 

For purposes of this letter, the term “loan participation” will include participations under the definition of “loan” in section 65, in short, loans other than real estate loans.  The term “mortgage loan participation” will include all participations having to do with mortgage loans.  For purposes of this letter, the terms “mortgage loan” and “real estate loan” are used interchangeably. 

Participation authority

With regard to loan participations, Chapter 454 sets forth the following section 65E of said chapter 171, which provides in relevant part:

“Every credit union, subject to limitations imposed by section 65 to section 65E, inclusive, or other general law, shall have the following powers and whatever further incidental or complementary powers that may fairly be implied from those expressly conferred and such as are reasonably necessary to enable it to exercise fully those powers according to common customs and usages:

…(3)  to buy, sell or make loans as participation loans with any other federally-insured credit union, bank or insurance company and to service any loans sold by it.”  (Emphasis added.)

Other authorities

While the following analysis is based on Section 65E(3), the Division notes there are other authorities that are relevant to this analysis as indicated below.  

Parity Regulation: As noted above, the two authorities for loan participations in the Parity Regulation are for consumer loan participations at 209 CMR 50.06(3)(h) and non-residential loan participations at 209 CMR 50.06(3)(i).  The authorities allow for participations with other credit unions, federal credit unions, federally-insured banks, a state or federal government agency or subdivision, and CUSOs, subject to the terms and conditions of the NCUA’s regulation at 12 CFR § 701.22.  The Parity Regulation also includes an aggregate limit on investing in participations up to 10% of assets, which does not exist in the federal regulation.  The Division further notes that in order to apply for approval under these authorities, the Parity Regulation includes several eligibility criteria at 209 CMR 50.05 and 209 CMR 50.06, including that a credit union must be adequately or well-capitalized, and not notified that it is in troubled condition, under 209 CMR 50.06(1).  The Division also notes that the authority for all mortgage loan participation approvals, both residential and non-residential, has been pursuant to 209 CMR 50.06(3)(i). 

NCUA Regulation: On September 23, 2013, several amendments to the NCUA’s participation regulation, 12 CFR § 701.22, became effective.  As noted above, one provision in the introductory paragraph of the regulation notes that all the loan participation requirements apply to state-chartered federally insured credit unions, with one exception.  This provision states, “Federally insured, state-chartered credit unions are required by 12 CFR § 741.225 of this chapter to comply with the loan participation requirements of this section.”  However, 12 CFR § 741.225, governing insurance requirements, provides that state-chartered, federally insured credit unions are exempt from the requirement regarding membership in 12 CFR § 701.22(b)(4).

Analysis

• Scope of Authority for Participations pursuant to Section 65E(3)

The Division notes that the words “loan” and “mortgage loan” are defined separately in G.L. c. 171, § 65.  However, only the word “loan” is included in G.L. c. 171, § 65E(3).  The main question regarding the scope of authority is whether the participation authority in Section 65E(3) includes both loans and mortgage loans.  Because those two terms were defined separately under the statute, the Division believes that the exclusion of “mortgage loans” from Section 65E(3) was intentional.  The introductory language in Section 65E also limits the authority in Section 65E(3) to the definitions in section 65.

It is the position of the Division that “loans” as defined under section 65 are subject to the participation authority under Section 65E(3).  “Mortgage loans” are subject to the participation authority under the Parity Regulation at 209 CMR 50.06(3)(i).

• Implications for Authority for Loan Participations and Mortgage Loan Participations

  (1) Loan Participations

  • Membership Requirement

The Division has determined that the legal authority for loan participations is within G.L. c. 171 § 65E(3).   Although other provisions of G.L. c. 171 were considered in this analysis, the language of Section 65E(3) provides state-chartered credit unions with authority to buy, sell or make loans as participation loans with any federally-insured credit union, bank or insurance company, without specific reference to membership.  For any participation in which a state-chartered credit union is originating the loan to the borrower, then the borrower will have to be a member of the credit union, and the loan must be made in accordance with G.L. c. 171. However, if a state-chartered credit union is entering into a loan participation with a credit union, bank or insurance company, and the state-chartered credit union is not originating the loan, there would be no membership requirements.

It is the position of the Division that a state-chartered credit union may participate in a loan being  originated by a credit union, bank or insurance company to a borrower that is not a member and is not eligible to become a member of the participating credit union provided the loan is the type of loan that the participating credit union could make under its Board-approved policies under G.L. c. 171, § 65A(g) through (i), inclusive, and that all other conditions of 12 CFR § 701.22 are met.  The loan can be secured by collateral anywhere in the United States.    

• Eligible Organizations

While there is overlap in the eligible organizations listed in Section 65E and 12 CFR § 701.22(a), there are some differences as well.  Section 65E(3) lists federally insured credit unions, banks and insurance companies.  12 CFR § 701.22(a) lists credit unions, credit union organizations (CUSOs), and financial organizations, which include any federally chartered or federally insured financial institution, and any state or federal government agency and its subdivisions (governmental entities).   The authority to extend this list beyond federally insured credit unions, banks and insurance companies does not exist in Section 65E(3). 

Since it is the position of the Division that the controlling authority for loan participations is Section 65E(3), the eligible organizations only include federally insured credit unions, banks or insurance companies.

Since the Parity Regulation for consumer loan participations under 209 CMR 50.06(3)(h) is still in effect, state-chartered credit unions, with approval, can still opt to enter into participations under that authority, which would include  governmental entities and CUSOs in addition to federally-insured credit unions and banks.  Note that all participations under the Parity Regulation must have the membership nexus required by the NCUA’s regulation at 12 CFR § 701.22(b)(4).   The Division notes that the NCUA’s regulation requires that certain conditions be met.  One of the conditions is that the borrower must be a member of one of the participating credit unions.  All of this is set forth in greater detail in the NCUA’s regulation at 12 CFR § 701.22. 

• 10% of Assets Limitation

The Division notes that the Parity Regulation also includes an aggregate limit on investing in participations up to 10% of assets (10% of assets limitation), which does not exist in the federal regulation.

The Division has determined that if the loan participation authority  is derived from  Section 65E(3),  the 10% of assets limitation as set out in the Parity Regulation does not apply.  However, the limitations set forth at G.L. c. 171, § 58 remain in effect, as well as the limitations in 12 CFR § 701.22, except for the membership requirement.

If the credit union opts to enter into consumer loan participations under the Parity authority instead, then the aggregate limit on investing in participations up to 10% of assets would remain in effect. 

(2) Mortgage Loan Participations

• Membership Requirements

Since mortgage loans are not included in the language of Section 65E(3), the Division has determined that the authority for mortgage loan participations is pursuant to the Parity Regulation at 209 CMR 50.06(3)(i), and requires Division approval in addition to the membership nexus required in the NCUA’s regulation at 12 CFR § 701.22(b)(4).  Participation in all mortgage loans, both residential and non-residential, must be entered into pursuant to the Division’s Parity Regulation authority.

• Eligible Organizations

For mortgage loans under 209 CMR 50.06(3)(i), the eligible organizations would also include state-chartered credit unions, federally chartered credit unions, federally-insured banks, governmental entities and CUSOs.   

• 10% of Assets Limitation

Since it is the position of the Division that the authority for mortgage loan participations is pursuant to the Parity Regulation at 209 CMR 50.06(3)(i), then the aggregate limit on investing in mortgage loan participations up to 10% of assets remains in effect.

Conclusion

It is the position of the Division that the authority for loan participations is pursuant to Section 65E(3) while the authority for mortgage loan participations is pursuant to the Parity Regulation at 209 CMR 50.06(3)(i).  A state-chartered credit union, pursuant to Section 65E(3), may participate in a loan being originated by a credit union, bank or insurance company to a borrower who is not a member and is not eligible to become a member provided the loan is the type of loan that the credit union could make under its Board-approved policies and that all conditions of 12 CFR § 701.22 are met.  There is no restriction with regard to membership, provided that all other conditions set forth herein are met.  The loan can be secured by collateral anywhere in the United States.

Mortgage loan participations may be entered into pursuant to the Parity Regulation at 209 CMR 50.06(3)(i), which includes the membership requirement. 

With regard to the question on whether notice and approval is required, since Section 65E(3) is the governing authority for loan participations, neither application nor notice to the Division is required.  This authority is available to all state-chartered credit unions.   For mortgage loan participations under the Parity Regulation, at this time, approval is still required, and other eligibility criteria under Parity must still be met.

In addition, please be advised that state-chartered credit unions are subject to all conditions of 12 CFR § 701.22 for both loan participations and mortgage loan participations.  For loan participations under Section 65E(3), credit unions are exempt from the membership requirements.  The Division will continue to review all participations during the examination process for compliance with Section 65E(3) and the Parity Regulation.  The lending limitations set forth in section 58 of chapter 171, as applicable, remain in effect.

The Division will be reviewing its current Parity Regulation in the coming months and proposing amendments to clarify loan participations, among other matters. In addition, the Division will continue to monitor any Legislative developments in this area.

If you have any questions, please contact Andrea Cipolla, Chief Director, at 617-956-1532. 

Sincerely,

David J. Cotney
Commissioner of Banks