I want to address the issue of loan participations. My clientshave expressed a keen interest in loan participations. Withbasically no return on overnight funds and the loan demand from themembers a little soft, some credit unions that have loans to sellthrough loan participations are helping the yield of other creditunions so long as the transaction is properly structured and asmany protections are in place as possible.

The NCUA is placing more and more emphasis on “regulatorycontrol” of loan participations. Chairman Debbie Matz has recentlypublicly stated that NCUA will be crafting “enhanced” regulationsso that all credit unions involved in loan participations will havesome “skin in the game.” In fact, the entire front page of the NCUAReport for October 2011 was devoted to NCUA's increased attentionto loan participations.

NCUA will be increasing the requirements regarding due diligencefor all loan participations. They will be requiring credit unionsto undertake more thorough and comprehensive reviews before, duringand throughout the life of the loan participation. There are anumber of key topics that I would like to bring to your attentionat this time so as you contemplate loan participations, you may bebetter protected and most certainly better prepared.

1. Somecontracts regarding loan participations make reference toguarantors, yetthere is usually very little documentation or, for that matter, duediligence with respect to any guarantors. This issue is becomingmore and more important, especially if the loans at issue arecommercial real estate loans or sizable member business loans.

2. In addition,as part of your continuing due diligence, it may be worthy ofconsideration to visit the subject property for the loan inquestion before and during the loan participation. If that is notpossible, you may at least want to do due diligence and visit theoriginating credit union's offices to confirm that you aresatisfied with the operation of that credit union.

3. Another areaof increasing concern is that of the servicer and the rights, ifany, that the servicer may have. Some agreements provide theservicer with absolute authority to modify the loan, and sometimesthat modification is to the detriment of the credit union.

4. Somecontracts often address underwriting standards and call for arepresentation or warranty that the underwriting standards havebeen reviewed, are consistent with the credit union's goals andobjectives, and are approved. However, some fail to review theasset liability policies of the originating credit union or atleast their underwriting standards.

5. There is asaying that all loans are good loans, until they go bad. Sometimesthe loan does not go bad for at least two to three years. Somecontracts call for a right to rescind/buy back the loans if thereis determined to be a material misrepresentation of fact that wasdiscovered within the first 18 months of the loan. Clearly, if theloan does not go delinquent for at least two years or more, this18-month buy back is not of benefit, so I encourage you to considera buy back right for the term of the loan.

6. When all elsefails, double-check the regulations. As you know, Section 701.22,Loan Participation, lists the details and requirements for all loanparticipations. Please remember that the regulations require awritten master participation agreement to be properly executed andacted upon by the credit union's Board of Directors or if delegatedby the Board, the Investment Committee or senior management.Regulations also provide that a participating federal credit unionthat is not the originating lender shall: (1) participate only inloans that it is empowered to grant; (2) has aparticipation/investment policy in place which sets forth the loanunderwriting standards prior to entering into a participationagreement; (3) participate in participation loans only if made toits own members or members of another participating credit union;(4) retain the original or a copy of the written participation loanagreement and a schedule of the loans covered by the agreement;and (5) obtain theapproval of the Board of Directors and Investment Committee of thedisbursement of proceeds to the originating lender.

I also suggest that you read and review once again NCUA LetterNo. 08-CU-26, which was addressed to all federally insured creditunions and pertains to evaluating loan participation programs.Although the document is somewhat stale, it continues to be theleading authority. The letter and its accompanying supervisoryletter will be the template for future NCUA examinations. It isprobably this document that will be further expanded, revised andenhanced by the NCUA as it continues to move forward and implementnew regulations so that there is further “skin in the game” on loanparticipations.

Clearly, loan participations have a lot to offer but alsoinclude a lot of risk. Review the contract carefully with yourlawyer.

E.Andrew Keeney is a Norfolk, Va.-based credit union attorneywith more than 35 years of experience.