12 Cfr 701.23 (1-1-17 Ed)

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§ 701.23

12 CFR Ch. VII (1–1–17 Edition)

the appropriate regional director, and,
in the case of a federally insured, statechartered credit union, with prior written concurrence of the appropriate
state supervisory authority;
(iii) Establish limits on the amount
of loan participations that may be purchased by each loan type, not to exceed
a specified percentage of the federally
insured credit union’s net worth; and
(iv) Establish a limit on the aggregate amount of loan participations
that may be purchased with respect to
a single borrower, or group of associated borrowers, not to exceed 15 percent of the federally insured credit
union’s net worth, unless waived by the
appropriate regional director, and, in
the case of a federally insured, statechartered credit union, with prior written concurrence of the appropriate
state supervisory authority.
(c) To seek a waiver from any of the
limitations in paragraph (b) of this section, a federally insured credit union
must submit a written request to its
regional director with a full and detailed explanation of why it is requesting the waiver. Within 45 days of receipt of a completed waiver request, including all necessary supporting documentation and, if appropriate, any
written concurrence, the regional director will provide the federally insured credit union a written response.
The regional director’s decision will be
based on safety and soundness and
other considerations; however, the regional director will not grant a waiver
to a federally insured, state-chartered
credit union without the prior written
concurrence of the appropriate state
supervisory authority. A federally insured credit union may appeal any part
of the waiver determination to the
NCUA Board. Appeals must be submitted through the regional director
within 60 days of the date of the determination.
(d) A loan participation agreement
must:
(1) Be properly executed by authorized representatives of all parties under
applicable law;
(2) Be properly authorized by the federally insured credit union’s board of
directors or, if the board has so delegated in its policy, a designated committee or senior management official,

under the federally insured credit
union’s bylaws and all applicable law;
(3) Be retained in the federally insured credit union’s office (original or
copies); and
(4) Include provisions which, at a
minimum, address the following:
(i) Prior to purchase, the identification of the specific loan participation(s) being purchased, either directly
in the agreement or through a document which is incorporated by reference into the agreement;
(ii) The interest that the originating
lender will retain in the loan to be participated. If the originating lender is a
federal credit union, the retained interest must be at least 10 percent of the
outstanding balance of the loan
through the life of the loan. If the originating lender is any other type of eligible organization, the retained interest must be at least 5 percent of the
outstanding balance of the loan
through the life of the loan, unless a
higher percentage is required under
state law;
(iii) The location and custodian for
original loan documents;
(iv) An explanation of the conditions
under which parties to the agreement
can gain access to financial and other
performance information about a loan,
the borrower, and the servicer so the
parties can monitor the loan;
(v) An explanation of the duties and
responsibilities of the originating lender, servicer, and participants with respect to all aspects of the participation, including servicing, default, foreclosure, collection, and other matters
involving the ongoing administration
of the loan; and
(vi) Circumstances and conditions
under which participants may replace
the servicer.
[78 FR 37956, June 25, 2013, as amended at 81
FR 13553, Mar. 14, 2016]

§ 701.23 Purchase, sale, and pledge of
eligible obligations.
This section governs a federal credit
union’s purchase, sale, or pledge of all
or part of a loan to one of its own
members, subject to a limited exception for certain well capitalized federal
credit unions, where no continuing
contractual obligation between the
seller and purchaser is contemplated.

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National Credit Union Administration

§ 701.23

For purchases of eligible obligations,
except as described in paragraph (b)(2)
of this section, the borrower must be a
member of the purchasing federal credit union before the purchase is made. A
federal credit union may not purchase
a non-member loan to hold in its portfolio.
(a) For purposes of this section:
(1) Eligible obligation means a loan or
group of loans.
(2) Student loan means a loan granted
to finance the borrower’s attendance at
an institution of higher education or at
a vocational school, which is secured
by and on which payment of the outstanding principal and interest has
been deferred in accordance with the
insurance or guarantee of the Federal
Government, of a State government, or
any agency of either.
(b) Purchase. (1) A Federal credit
union may purchase, in whole or in
part, within the limitations of the
board of directors’ written purchase
policies:
(i) Eligible obligations of its members, from any source, if either: (A)
They are loans it is empowered to
grant or (B) they are refinanced with
the consent of the borrowers, within 60
days after they are purchased, so that
they are loans it is empowered to
grant;
(ii) Eligible obligations of a liquidating credit union’s individual members, from the liquidating credit union;
(iii) Student loans, from any source,
if the purchaser is granting student
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 market; and
(iv) Real estate-secured loans, from
any source, if the purchaser is granting
real estate-secured loans pursuant to
§ 701.21 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 mortage market. A pool
must include a substantial portion of
the credit union’s members’ loans and
must be sold promptly.
(2) Purchase of obligations from a
FICU. A federal credit union that received a composite CAMEL rating of
‘‘1’’ or ‘‘2’’ for the last two (2) full ex-

aminations and maintained a net
worth classification of ‘‘well capitalized’’ under part 702 of this chapter for
the six (6) immediately preceding quarters or, if subject to a risk-based net
worth (RBNW) requirement under part
702 of this chapter, has remained ‘‘well
capitalized’’ for the six (6) immediately
preceding quarters after applying the
applicable RBNW requirement may
purchase and hold the following obligations, provided that it would be empowered to grant them:
(i) Eligible obligations. Eligible obligations without regard to whether they
are obligations of its members, provided they are purchased from a federally-insured credit union and the obligations are either:
(A) Loans the purchasing credit
union is empowered to grant; or
(B) Loans refinanced with the consent of the borrowers, within 60 days
after they are purchased, so that they
are loans the purchasing credit union
is empowered to grant;
(ii) Eligible obligations of a liquidating
credit union. Eligible obligations of a
liquidating credit union without regard
to whether they are obligations of the
liquidating credit union’s members.
(iii) Student loans. Student loans provided they are purchased from a federally-insured credit union only;
(iv) Real estate-secured loans. Real estate-secured loans provided they are
purchased from a federally-insured
credit union only;
(3) A Federal credit union may make
purchases in accordance with this paragraph (b), provided:
(i) The board of directors or investment committee approves the purchase;
(ii) A written agreement and a schedule of the eligible obligations covered
by the agreement are retained in the
purchasers office; and
(iii) For purchases under paragraph
(b)(1)(ii) of this section, any advance
written approval required by § 741.8 of
this chapter is obtained before consummation of such purchase.
(4) The aggregate of the unpaid balance of eligible obligations purchased
under paragraphs (b)(1) and (b)(2)(ii) of
this section shall not exceed 5 percent
of the unimpaired capital and surplus
of the purchaser. The following can be

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§ 701.23

12 CFR Ch. VII (1–1–17 Edition)

exculded in calculating this 5 percent
limitation:
(i) Student loans purchased in accordance with paragraph (b)(1)(iii) of
this section;
(ii) Real estate loans purchased in accordance with paragraph (b)(1)(iv) of
this section;
(iii) Eligible obligations purchased in
accordance with paragraph (b)(1)(i) of
this section that are refinanced by the
purchaser so that it is a loan it is empowered to grant;
(iv) An indirect lending or indirect
leasing arrangement that is classified
as a loan and not the purchase of an eligible obligation because the Federal
credit union makes the final underwriting decision and the sales or lease
contract is assigned to the Federal
credit union very soon after it is signed
by the member and the dealer or leasing company.
(5) Grandfathered purchases. Subject
to safety and soundness considerations,
a federal credit union may hold any of
the loans described in paragraph (b)(2)
of this section provided it was authorized to purchase the loan and purchased the loan before July 2, 2012.
(c) Sale. A Federal credit union may
sell, in whole or in part, to any source,
eligible obligations of its members, eligible obligations purchased in accordance with paragraph (b)(1)(ii) of this
section, student loans purchased in accordance with paragraph (b)(1)(iii) of
this section, and real estate loans purchased in accordance with paragraph
(b)(1)(iv) of this section, within the
limitations of the board of directors’
written sale policies, Provided:
(1) The board of directors or investment committee approves the sale; and
(2) A written agreement and a schedule of the eligible obligations covered
by the agreement are retained in the
seller’s office.
(d) Pledge. (1) A Federal credit union
may pledge, in whole or in part, to any
source, eligible obligations of its members, eligible obligations purchased in
accordance with paragraph (b)(1)(ii) of
this section, student loans purchased
in accordance with paragraph (b)(1)(iii)
of this section, and real estate loans
purchased in accordance with paragraph (b)(1)(iv) of this section, within

the limitations of the board of directors’ written pledge policies, Provided:
(i) The board of directors or investment committee approves the pledge;
(ii) Copies of the original loan documents are retained; and
(iii) A written agreement covering
the pledging arrangement is retained
in the office of the credit union that
pledges the eligible obligations.
(2) The pledge agreement shall identify the eligible obligations covered by
the agreement.
(e) Servicing. A Federal credit union
may agree to service any eligible obligation it purchases or sells in whole or
in part.
(f) 10 Percent limitation. The total indebtedness owing to any Federal credit
union by any person, inclusive of retained and reacquired interests, shall
not exceed 10 percent of its unimpaired
capital and surplus.
(g)(1) Conflicts of interest. No federal
credit union official, employee, or their
immediate family member may receive, directly or indirectly, any compensation in connection with that credit union’s purchase, sale, or pledge of
an eligible obligation under the provisions of § 701.23.
(2) Permissible payments. This section
does not prohibit:
(i) A federal credit union’s payment
of salary to employees;
(ii) A federal credit union’s payment
of an incentive or bonus to an employee based on the credit union’s overall financial performance;
(iii) A federal credit union’s payment
of an incentive or bonus to an employee, other than a senior management employee, in connection with
that credit union’s purchase, sale or
pledge of an eligible obligation. This
payment is permissible if the board of
directors establishes a written policy
and internal controls for the incentive
or bonus program and monitors compliance with the policy and controls at
least annually; and
(iv) Payment by a person other than
the federal credit union of compensation to a volunteer official, non-senior
management employee, or their immediate family member, for a service or
activity performed outside the credit
union provided that the federal credit
union, the official, employee, or their

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National Credit Union Administration

§ 701.24

immediate family member has not
made a referral.
(3) Business associates and family members. All transactions under this section with business associates or family
members not specifically prohibited by
paragraph (g)(1) of this section must be
conducted at arm’s length and in the
interest of the federal credit union.
(4) Definitions. The definitions in
§ 701.21(c)(8)(ii) of this part apply to
this section.
(h) Additional authority. (1) A federal
credit union may submit a written request to its regional director seeking
expanded authority to purchase loans
described in paragraph (b)(2) of this
section, if it is not otherwise authorized by this section. The written request must include the following:
(i) A copy of the credit union’s purchase policy;
(ii) The types of eligible obligations
under paragraph (b)(2) of this section
that the credit union seeks to purchase;
(iii) An explanation of the need for
additional authority; and
(iv) An analysis of the credit union’s
prior experience with the purchase of
eligible obligations.
(2) Approval process. A regional director will provide a written determination on a request for expanded authority within 60 calendar days after receipt of the request; however, the 60day period will not begin until the requesting credit union has submitted all
necessary information to the regional
director. The regional director will inform the requesting credit union, in
writing, of the date the request was received and of any additional documentation that the regional director
requires in support of the request. If
the regional director approves the request, the regional director will establish a limit on loan purchases as appropriate and subject to the limitations in
this section. If the regional director
does not notify the credit union of the
action taken on its request within 60
calendar days of the receipt of the request or the receipt of additional requested supporting information, whichever occurs later, the credit union may
purchase loans it requested under paragraph (b)(2) of this section.

(3) Appeal to NCUA Board. A federal
credit union may appeal any part of
the determination made under this
paragraph to the NCUA Board by submitting its appeal through the regional
director within 30 days of the date of
the determination.
[44 FR 27071, May 9, 1979, as amended at 46
FR 38680, July 29, 1981. Redesignated at 49 FR
30688, Aug. 1, 1984, and amended at 53 FR 4844,
Feb. 18, 1988; 56 FR 15036, Apr. 15, 1991; 56 FR
35811, July 29, 1991; 60 FR 58504, Nov. 28, 1995;
63 FR 70998, Dec. 23, 1998; 72 FR 65442, Nov. 21,
2007; 77 FR 31990, May 31, 2012; 78 FR 37958,
June 25, 2013]
EFFECTIVE DATE NOTE: At 80 FR 66706, Oct.
29, 2015, § 701.23 was amended in paragraph
(b)(2) by removing the words ‘‘net worth’’
and adding the word ‘‘capital’’ in their place
and by removing the words ‘‘or, if subject to
a risk-based net worth (RBNW) requirement
under part 702 of this chapter, has remained
‘well capitalized’ for the six (6) immediately
preceding quarters after applying the applicable RBNW requirement’’, effective Jan. 1,
2019.

§ 701.24

Refund of interest.

(a) The board of directors of a Federal credit union may authorize an interest refund to members who paid interest to the credit union during any
dividend period and who are members
of record at the close of business on the
last day of such dividend period. Interest refunds may be made for a dividend
period only if dividends on share accounts have been declared and paid for
that period.
(b) The amount of interest refund to
each member shall be determined as a
percentage of the interest paid by the
member. Such percentage may vary according to the type of extension of
credit and the interest rate charged.
(c) The board of directors may exclude from an interest refund:
(1) A particular type of extension of
credit;
(2) Any extension of credit made at a
particular interest rate; and
(3) Any extension of credit that is
presently delinquent or has been delinquent within the period for which the
refund is being made.
[53 FR 19747, May 31, 1988]

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