12 Cfr 701.21 (1-1-20 Ed)

National Credit Union Administration

§ 701.21

unless it has obtained appropriate liability insurance as described and permitted by Section 410(b) of the Employee Retirement Income Security
Act of 1974.
(f) Definitions. For this section, defined benefit plan has the same meaning as in 29 U.S.C. 1002(35) and employee benefit plan has the same meaning as in 29 U.S.C. 1002(3).

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[68 FR 23027, Apr. 30, 2003]

§ 701.20 Suretyship and guaranty.
(a) Scope. This section authorizes a
federal credit union to enter into a
suretyship or guaranty agreement as
an incidental powers activity. This section does not apply to the guaranty of
public deposits or the assumption of liability for member accounts.
(b) Definitions. A suretyship binds a
federal credit union with its principal
to pay or perform an obligation to a
third person. Under a guaranty agreement, a federal credit union agrees to
satisfy the obligation of the principal
only if the principal fails to pay or perform. The principal is the person primarily liable, for whose performance of
his obligation the surety or guarantor
has become bound.
(c) Requirements. The suretyship or
guaranty agreement must be for the
benefit of a principal that is a member
and is subject to the following conditions:
(1) The federal credit union limits its
obligations under the agreement to a
fixed dollar amount and a specified duration;
(2) The federal credit union’s performance under the agreement creates
an authorized loan that complies with
the applicable lending regulations, including the limitations on loans to one
member or associated members or officials for purposes of §§ 701.21(c)(5), (d);
723.4(c); and
(3) The federal credit union obtains a
segregated deposit from the member
that is sufficient in amount to cover
the federal credit union’s total potential liability.
(d) Collateral. A segregated deposit
under this section includes collateral:
(1) In which the federal credit union
has perfected its security interest (for
example, if the collateral is a printed
security, the federal credit union must

have obtained physical control of the
security, and, if the collateral is a book
entry security, the federal credit union
must have properly recorded its security interest); and
(2) That has a market value, at the
close of each business day, equal to 100
percent of the federal credit union’s
total potential liability and is composed of:
(i) Cash;
(ii) Obligations of the United States
or its agencies;
(iii) Obligations fully guaranteed by
the United States or its agencies as to
principal and interest; or
(iv) Notes, drafts, or bills of exchange
or banker’s acceptances that are eligible for rediscount or purchase by a
Federal Reserve Bank; or
(3) That has a market value equal to
110 percent of the federal credit union’s
total potential liability and is composed of:
(i) Real estate, the value of which is
established by a signed appraisal or
evaluation in accordance with part 722
of this chapter. In determining the
value of the collateral, the federal
credit union must factor in the value of
any existing senior mortgages, liens or
other encumbrances on the property
except those held by the principal to
the suretyship or guaranty agreement;
or
(ii) Marketable securities that the
federal credit union is authorized to invest in. The federal credit union must
ensure that the value of the security is
110 percent of the obligation at all
times during the term of the agreement.
[69 FR 8547, Feb. 25, 2004, as amended at 84
FR 10975, Mar. 25, 2019]

§ 701.21 Loans to members and lines of
credit to members.
(a) Statement of scope and purpose.
Section 701.21 complements the provisions of section 107(5) of the Federal
Credit Union Act (12 U.S.C. 1757(5)) authorizing Federal credit unions to
make loans to members and issue lines
of credit (including credit cards) to
members. Section 107(5) of the Act contains limitations on matters such as
loan maturity, rate of interest, security, and prepayment penalties. Section 701.21 interprets and implements

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§ 701.21

12 CFR Ch. VII (1–1–20 Edition)

those provisions. In addition, § 701.21
states the NCUA Board’s intent concerning preemption of state laws, and
expands the authority of Federal credit
unions to enforce due-on-sale clauses in
real property loans. Also, while § 701.21
generally applies to Federal credit
unions only, certain provisions apply
to loans made by federally insured,
state-chartered credit unions as specified in § 741.203 of this chapter. Part 722
of this chapter sets forth requirements
for appraisals for certain real estate secured loans made under § 701.21 and any
other applicable lending authority. Finally, it is noted that § 701.21 does not
apply to loans by Federal credit unions
to other credit unions (although certain statutory limitations in section
107 of the Act apply), nor to loans to
credit union organizations which are
governed by section 107(5)(D) of the Act
and part 712 of this chapter.
(b) Relation to other laws—(1) Preemption of state laws. Section 701.21 is promulgated pursuant to the NCUA
Board’s exclusive authority as set forth
in section 107(5) of the Federal Credit
Union Act (12 U.S.C 1757(5)) to regulate
the rates, terms of repayment and
other conditions of Federal credit
union loans and lines of credit (including credit cards) to members. This exercise of the Board’s authority preempts any state law purporting to
limit or affect:
(i)(A) Rates of interest and amounts
of finance charges, including:
(1) The frequency or the increments
by which a variable interest rate may
be changed;
(2) The index to which a variable interest rate may be tied;
(3) The manner or timing of notifying
the borrower of a change in interest
rate;
(4) The authority to increase the interest rate on an existing balance;
(B) Late charges; and
(C) Closing costs, application, origination, or other fees;
(ii) Terms of repayment, including:
(A) The maturity of loans and lines
of credit;
(B) The amount, uniformity, and frequency of payments, including the accrual of unpaid interest if payments
are insufficient to pay all interest due;
(C) Balloon payments; and

(D) Prepayment limits;
(iii) Conditions related to:
(A) The amount of the loan or line of
credit;
(B) The purpose of the loan or line of
credit;
(C) The type or amount of security
and the relation of the value of the security to the amount of the loan or
line of credit;
(D) Eligible borrowers; and
(E) The imposition and enforcement
of liens on the shares of borrowers and
accommodation parties.
(2) Matters not preempted. Except as
provided by paragraph (b)(1) of this section, it is not the Board’s intent to preempt state laws that do not affect
rates, terms of repayment and other
conditions described above concerning
loans and lines of credit, for example:
(i) Insurance laws;
(ii) Laws related to transfer of and
security interests in real and personal
property (see, however, paragraph (g)(6)
of this section concerning the use and
exercise of due-on-sale clauses);
(iii) Conditions related to:
(A) Collection costs and attorneys’
fees;
(B) Requirements that consumer
lending documents be in ‘‘plain language;’’ and
(C) The circumstances in which a
borrower may be declared in default
and may cure default.
(3) Other Federal law. Except as provided by paragraph (b)(1) of this section, it is not the Board’s intent to preempt state laws affecting aspects of
credit transactions that are primarily
regulated by Federal law other than
the Federal Credit Union Act, for example, state laws concering credit cost
disclosure requirements, credit discrimination, credit reporting practices,
unfair credit practices, and debt collection practices. Applicability of state
law in these instances should be determined pursuant to the preemption
standards of the relevant Federal law
and regulations.
(4) Examination and enforcement. Except as otherwise agreed by the NCUA
Board, the Board retains exclusive examination and administrative enforcement jurisdiction over Federal credit
unions. Violations of Federal or applicable state laws related to the lending

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National Credit Union Administration

§ 701.21

activities of a Federal credit union
should be referred to the appropriate
NCUA regional office.
(5) Definition of State law. For purposes of paragraph (b) of this section
‘‘state law’’ means the constitution,
laws, regulations and judicial decisions
of any state, the District of Columbia,
the several territories and possessions
of the United States, and the Commonwealth of Puerto Rico.
(c) General rules—(1) Scope. The following general rules apply to all loans
to members and, where indicated, all
lines of credit (including credit cards)
to members, except as otherwise provided in the remaining provisions of
§ 701.21.
(2) Written policies. The board of directors of each Federal credit union shall
establish written policies for loans and
lines of credit consistent with the relevant provisions of the Act, NCUA’s
regulations, and other applicable laws
and regulations.
(3) Credit applications and overdrafts.
Consistent with policies established by
the board of directors, the credit committee or loan officer shall ensure that
a credit application is kept on file for
each borrower supporting the decision
to make a loan or establish a line of
credit. A credit union may advance
money to a member to cover an account deficit without having a credit
application from the borrower on file if
the credit union has a written overdraft policy. The policy must: set a cap
on the total dollar amount of all overdrafts the credit union will honor consistent with the credit union’s ability
to absorb losses; establish a time limit
not to exceed forty-five calendar days
for a member either to deposit funds or
obtain an approved loan from the credit union to cover each overdraft; limit
the dollar amount of overdrafts the
credit union will honor per member;
and establish the fee and interest rate,
if any, the credit union will charge
members for honoring overdrafts.
(4) Maturity—(i) In general. The maturity of a loan to a member may not exceed 15 years. Lines of credit are not
subject to a statutory or regulatory
maturity limit. Amortization of line of
credit balances and the type and
amount of security on any line of credit shall be as determined by contract

between the Federal credit union and
the member/borrower. In the case of a
lending action that qualifies as a ‘‘new
loan’’ under GAAP, the new loan’s maturity is calculated from the new date
of origination.
(ii) Exceptions. Notwithstanding the
general 15-year maturity limit on loans
to members, a federal credit union may
make loans with maturities:
(A) As specified in the law, regulations or program under which a loan is
secured, in full or in part, by the insurance or guarantee of, or with an advance commitment to purchase the
loan, in full or in part, by the Federal
Government, a State government or
any agency of either, as provided in
paragraph (e) of this section;
(B) of up to 20 years or such longer
term as is provided in paragraph (f) of
this section; and
(C) of up to 40 years or such longer
term as is provided in paragraph (g) of
this section.
(5) Ten percent limit. No loan or line of
credit advance may be made to any
member if such loan or advance would
cause that member to be indebted to
the Federal credit union upon loans
and advances made to the member in
an aggregate amount exceeding 10% of
the credit union’s total unimpaired
capital and surplus. In the case of loan
participations as defined in § 701.22(a) of
this part and commercial loans as defined in § 723.2 of this chapter, additional limitations apply as set forth in
§ 701.22(b)(5)(iv) of this part and
§ 723.4(c) of this chapter.
(6) Early payment. A member may
repay a loan, or outstanding balance on
a line of credit, prior to maturity in
whole or in part on any business day
without penalty.
(7) Loan interest rates—(i) General. Except when the Board establishes a higher maximum rate, federal credit unions
may not extend credit to members at
rates exceeding 15 percent per year on
the unpaid balance inclusive of all finance charges. Federal credit unions
may use variable rates of interest but
only if the effective rate over the term
of a loan or line of credit does not exceed the maximum permissible rate.

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§ 701.21

12 CFR Ch. VII (1–1–20 Edition)

(ii) Temporary rates. (A) At least
every 18 months, the Board will determine if federal credit unions may extend credit to members at an interest
rate exceeding 15 percent. After consultation with appropriate congressional committees, the Department of
Treasury, and other federal financial
institution regulatory agencies, the
Board may establish a rate exceeding
the 15 percent per year rate, if it determines money market interest rates
have risen over the preceding sixmonth period and prevailing interest
rate levels threaten the safety and
soundness of individual federal credit
unions as evidenced by adverse trends
in liquidity, capital, earnings, and
growth.
(B) When the Board establishes a
higher maximum rate, the Board will
provide notice to federal credit unions
of the adjusted rate by issuing a Letter
to Federal Credit Unions, as well as providing information in other NCUA publications and in a statement for the
press.
(C) Federal credit unions may continue to charge rates exceeding the established maximum rate only on existing loans or lines of credit made before
the effective date of any lowering of
the maximum rate.
(iii) Payday alternative loans (PALs
I)—(A) Minimum requirements for PALs I.
Notwithstanding any other provision of
this section, a federal credit union may
charge an interest rate that is 1000
basis points above the maximum interest rate established by the Board under
paragraph (c)(7)(ii) of this section provided the federal credit union is offering closed-end credit, as defined in
§ 1026.2(a)(10) of this title, in accordance
with the following conditions:
(1) The principal of the payday alternative loan is not less than $200 or
more than $1,000;
(2) The payday alternative loan has a
minimum maturity of one month and a
maximum maturity of six months;
(3) The federal credit union does not
make more than three payday alternative loans provided under either this
paragraph
(c)(7)(iii)
or
paragraph
(c)(7)(iv) of this section in any rolling
six-month period to any one borrower
and does not make more than one payday alternative loan provided under ei-

ther this paragraph (c)(7)(iii) or paragraph (c)(7)(iv) of this section at a time
to any borrower;
(4) The federal credit union does not
rollover any payday alternative loan
provided under this paragraph (c)(7)(iii)
or paragraph (c)(7)(iv) of this section,
provided that the prohibition against
rollovers does not apply to an extension of a payday alternative loan term
within the maximum loan term set
forth in paragraph (c)(7)(iii)(A)(3) of
this section that does not include any
additional fees assessed or extend additional credit to the borrower;
(5) The federal credit union fully amortizes the payday alternative loan;
(6) The federal credit union requires
the borrower to be a member of the
credit union for at least one month before receiving a payday alternative
loan provided under this paragraph
(c)(7)(iii);
(7) The federal credit union charges a
reasonable application fee to all members applying for a new payday alternative loan offered under this paragraph (c)(7)(iii) that reflects the actual
costs associated with processing the
application, but that in no case exceeds
$20; and
(8) The federal credit union includes,
in its written lending policies, a limit
on the aggregate dollar amount of payday alternative loans made under this
paragraph (c)(7)(iii) and paragraph
(c)(7)(iv) of this section that does not
exceed an aggregate of 20% of net
worth and implements appropriate underwriting guidelines to minimize risk,
such as, requiring a borrower to verify
employment by providing at least two
recent pay stubs.
(B) PALs I guidance and best practices.
In developing a successful payday alternative loan program, a federal credit union should consider how the program would benefit a member’s financial well-being while considering the
higher degree of risk associated with
this type of lending. The guidance and
best practices are intended to help federal credit unions minimize risk and
develop a successful program, but are
not an exhaustive checklist and do not
guarantee a successful program with a
low degree of risk.

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National Credit Union Administration

§ 701.21

(1) Program features. Several features
that may increase the success of a payday alternative loan program and enhance member benefit include adding a
savings component, financial education, reporting of members’ payment
of payday alternative loans to credit
bureaus, or electronic loan transactions as part of a payday alternative
loan program. In addition, although a
federal credit union cannot require
members to authorize a payroll deduction, a federal credit union should encourage or incentivize members to utilize payroll deduction.
(2)
Underwriting.
Federal
credit
unions should develop minimum underwriting standards that account for a
member’s need for quickly available
funds, while adhering to principles of
responsible
lending.
Underwriting
standards should address required documentation for proof of employment or
income, including at least two recent
paycheck stubs. Federal credit unions
should be able to use a borrower’s proof
of recurring income as the key criterion in developing standards for maturity lengths and loan amounts so a
borrower can manage repayment of the
loan. For members with established accounts, federal credit unions should
only need to review a member’s account records and proof of recurring income or employment.
(3) Risk avoidance. Federal credit
unions should consider risk avoidance
strategies, including requiring members to participate in direct deposit
and conducting a thorough evaluation
of the federal credit union’s resources
and ability to engage in a payday alternative loan program.
(iv) Payday alternative loans (PALs
II)—(A) Minimum requirements for PALs
II. Notwithstanding any other provision of this section, a federal credit
union may charge an interest rate that
is 1000 basis points above the maximum
interest rate established by the Board
under paragraph (c)(7)(ii) of this section provided the federal credit union
is offering closed-end credit, as defined
in § 1026.2(a)(10) of this title, in accordance with the following conditions:
(1) The principal of the payday alternative loan is not more than $2,000;

(2) The payday alternative loan has a
minimum maturity of one month and a
maximum maturity of 12 months;
(3) The federal credit union does not
make more than three payday alternative loans provided either under
paragraph (c)(7)(iii) of this section or
this paragraph (c)(7)(iv) in any rolling
six-month period to any one borrower
and does not make more than one payday alternative loan provided under either paragraph (c)(7)(iii) of this section
or this paragraph (c)(7)(iv) at a time to
any borrower;
(4) The federal credit union does not
rollover any payday alternative loan
provided under paragraph (c)(7)(iii) of
this section or this paragraph (c)(7)(iv),
provided that the prohibition against
rollovers does not apply to an extension of a payday alternative loan term
within the maximum loan term set
forth in paragraph (c)(7)(iv)(A)(3) of
this section that does not include any
additional fees assessed or extend additional credit to the borrower;
(5) The federal credit union fully amortizes the payday alternative loan;
(6) The federal credit union charges a
reasonable application fee to all members applying for a new payday alternative loan offered under this paragraph (c)(7)(iv) that reflects the actual
costs associated with processing the
application, but that in no case exceeds
$20;
(7) The federal credit union does not
assess a fee or charge, including a nonsufficient funds fee, on the borrower’s
account pursuant to the federal credit
union’s overdraft service, as defined in
§ 1005.17(a) of this title, in connection
with any payday alternative loan provided under this paragraph (c)(7)(iv);
and
(8) The federal credit union includes,
in its written lending policies, a limit
on the aggregate dollar amount of payday alternative loans made under paragraph (c)(7)(iii) of this section and this
paragraph (c)(7)(iv) that does not exceed an aggregate of 20% of net worth
and implements appropriate underwriting guidelines to minimize risk,
such as, requiring a borrower to verify
employment by providing at least two
recent pay stubs.
(B) PALs II guidance and best practices. In developing a successful payday

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§ 701.21

12 CFR Ch. VII (1–1–20 Edition)

alternative loan program, a federal
credit union should consider how the
program would benefit a member’s financial well-being while considering
the higher degree of risk associated
with this type of lending. The guidance
and best practices are intended to help
federal credit unions minimize risk and
develop a successful program, but are
not an exhaustive checklist and do not
guarantee a successful program with a
low degree of risk.
(1) Program features. Several features
that may increase the success of a payday alternative loan program and enhance member benefit include adding a
savings component, financial education, reporting of members’ payment
of payday alternative loans to credit
bureaus, or electronic loan transactions as part of a payday alternative
loan program. In addition, although a
federal credit union cannot require
members to authorize a payroll deduction, a federal credit union should encourage or incentivize members to utilize payroll deduction.
(2)
Underwriting.
Federal
credit
unions should develop minimum underwriting standards that account for a
member’s need for quickly available
funds, while adhering to principles of
responsible
lending.
Underwriting
standards should address required documentation for proof of employment or
income, including at least two recent
paycheck stubs. Federal credit unions
should be able to use a borrower’s proof
of recurring income as the key criterion in developing standards for maturity lengths and loan amounts so a
borrower can manage repayment of the
loan. For members with established accounts, federal credit unions should
only need to review a member’s account records and proof of recurring income or employment.
(3) Risk avoidance. Federal credit
unions should consider risk avoidance
strategies, including requiring members to participate in direct deposit
and conducting a thorough evaluation
of the federal credit union’s resources
and ability to engage in a payday alternative loan program.
(8)(i) Except as otherwise provided
herein, no official or employee of a
Federal credit union, or immediate
family member of an official or em-

ployee of a Federal credit union, may
receive, directly or indirectly, any
commission, fee, or other compensation in connection with any loan made
by the credit union.
(ii) For the purposes of this section:
Compensation includes non-monetary
items, except those of nominal value.
Immediate family member means a
spouse or other family member living
in the same household.
Loan includes line of credit.
Official means any member of the
board of directors or a volunteer committee.
Person means an individual or an organization.
Senior management employee means
the credit union’s chief executive officer (typically, this individual holds the
title of President or Treasurer/Manager), any assistant chief executive officers (e.g., Assistant President, Vice
President, or Assistant Treasurer/Manager), and the chief financial officer
(Comptroller).
Volunteer official means an official of
a credit union who does not receive
compensation from the credit union
solely for his or her service as an official.
(iii) This section does not prohibit:
(A) Payment, by a Federal credit
union, of salary to employees;
(B) Payment, by a Federal credit
union, of an incentive or bonus to an
employee based on the credit union’s
overall financial performance;
(C) Payment, by a Federal credit
union, of an incentive or bonus to an
employee, other than a senior management employee, in connection with a
loan or loans made by the credit union,
provided that the board of directors of
the credit union establishes written
policies and internal controls in connection with such incentive or bonus
and monitors compliance with such
policies and controls at least annually.
(D) Receipt of compensation from a
person outside a Federal credit union
by a volunteer official or non-seniormanagement employee of the credit
union, or an immediate family member
of a volunteer official or employee of
the credit union, for a service or activity performed outside the credit union,
provided that no referral has been

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National Credit Union Administration

§ 701.21

made by the credit union or the official, employee, or family member.
(d) Loans and lines of credit to officials—(1) Purpose. Sections 107(5)(A) (iv)
and (v) of the Act require the approval
of the board of directors of the Federal
credit union in any case where the aggregate of loans to an official and loans
on which the official serves as endorser
or guarantor exceeds $20,000 plus
pledged shares. This paragraph implements the requirement by establishing
procedures for determining whether
board of directors’s approval is required. The section also prohibits preferential treatment of officials.
(2) Official. An ‘‘official’’ is any member of the board of directors, credit
committee or supervisory committee.
(3) Initial approval. All applications
for loans or lines of credit on which an
official will be either a direct obligor
or an endorser, cosigner or guarantor
shall be initially acted upon by either
the board of directors, the credit committee or a loan officer, as specified in
the Federal credit union’s bylaws.
(4) Board of Directors’ review. The
board of directors shall, in any case, review and approve or deny an application on which an official is a direct obligor, endorser, cosigner or guarantor if
the following computation produces a
total in excess of $20,000:
(i) Add:
(A) The amount of the current application.
(B) The outstanding balances of
loans, including the used portion of an
approved line of credit, extended to or
endorsed, cosigned or guaranteed by
the official.
(C) The total unused portion of approved lines of credit extended to or
endorsed, cosigned or guaranteed by
the official.
(ii) From the above total subtract:
(A) The amount of shares pledged by
the official on loans or lines of credit
extended to or endorsed, cosigned or
guaranteed by the official.
(B) The amount of shares to be
pledged by the official on the loan or
line of credit applied for.
(5) Nonpreferential treatment. The
rates, terms and conditions on any
loan or line of credit either made to, or
endorsed or guaranteed by—
(i) An official,

(ii) An immediate family member of
an official, or
(iii) Any individual having a common
ownership, investment or other pecuniary interest in a business enterprise
with an official or with an immediate
family member of an official
shall not be more favorable than the
rates, terms and conditions for comparable loans or lines of credit to other
credit union members. ‘‘Immediate
family member’’ means a spouse or
other family member living in the
same household.
(e) Insured, guaranteed, and advance
commitment loans. Notwithstanding the
general 15-year maturity limit on loans
to members in paragraph (c)(4) of this
section, a loan secured, in full or in
part, by the insurance or guarantee of,
or with an advance commitment to
purchase the loan, in full or in part, by
the Federal Government, a State government or any agency of either, may
be made for the maturity and under
the terms and conditions, including
rate of interest, specified in the law,
regulations or program under which
the insurance, guarantee or commitment is provided.
(f) 20-Year Loans. (1) Notwithstanding
the general 15-year maturity limit on
loans to members in paragraph (c)(4) of
this section, a federal credit union may
make loans with maturities of up to 20
years in the case of:
(i) A loan to finance the purchase of
a mobile home if the mobile home will
be used as the member-borrower’s residence and the loan is secured by a first
lien on the mobile home, and the mobile home meets the requirements for
the home mortgage interest deduction
under the Internal Revenue Code,
(ii) A second mortgage loan (or a
nonpurchase money first mortgage
loan in the case of a residence on which
there is no existing first mortgage) if
the loan is secured by a residential
dwelling which is the residence of the
member-borrower, and
(iii) A loan to finance the repair, alteration, or improvement of a residential dwelling which is the residence of
the member-borrower.
(2) For purposes of this paragraph (f),
mobile home may include a recreational vehicle, house trailer or boat.

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§ 701.21

12 CFR Ch. VII (1–1–20 Edition)

(3) Notwithstanding the general 20year maturity limit on second mortgage loans, a federal credit union participating in the Department of the
Treasury’s Making Home Affordable
Program may extend the term of a
modified second mortgage to match
the term of a modified first mortgage,
in accordance with applicable program
guidelines.
(g) Long-Term Mortgage Loans—(1) Authority. Notwithstanding the general
15-year maturity limit on loans to
members in paragraph (c)(4) of this section, a federal credit union may make
residential real estate loans to members, including loans secured by manufactured homes permanently affixed to
the land, with maturities of up to 40
years, or such longer period as may be
permitted by the NCUA Board on a
case-by-case basis, subject to the conditions of this paragraph (g).
(2) Statutory limits. The loan shall be
made on a one to four family dwelling
that is or will be the principal residence of the member-borrower and the
loan shall be secured by a perfected
first lien in favor of the credit union on
such dwelling (or a perfected first security interest in the case of either a residential cooperative or a leasehold or
ground rent estate).
(3) Loan application. The loan application shall be a completed standard Federal Housing Administration, Veterans
Administration, Federal Home Loan
Mortgage Corporation, Federal National Mortgage Association or Federal
Home Loan Mortgage Corporation/Federal National Mortgage Association application form. In lieu of use of a
standard application the Federal credit
union may have a current attorney’s
opinion on file stating that the forms
in use meet the requirements of applicable Federal, state and local laws.
(4) Security instrument and note. The
security instrument and note shall be
executed on the most current version
of the FHA, VA, FHLMC, FNMA, or
FHLMC/FNMA Uniform Instruments
for the jurisdiction in which the property is located. No prepayment penalty
shall be allowed, although a Federal
credit union may require that any partial prepayments be made on the date
monthly installments are due and be in
the amount of that part of one or more

monthly installments that would be
applicable to principal. In lieu of use of
a standard security instrument and
note, the Federal credit union may
have a current attorney’s opinion on
file stating that the security instrument and note in use meet the requirements of applicable Federal, state and
local laws.
(5) First lien, territorial limits. The loan
shall be secured by a perfected first
lien or first security interest in favor
of the credit union supported by a
properly executed and recorded security instrument. No loan shall be secured by a residence located outside
the United States of America, its territories and possessions, or the Commonwealth of Puerto Rico.
(6) Due-on-sale clauses. (i) Except as
otherwise provided herein, the exercise
of a due-on-sale clause by a Federal
credit union is governed exclusively by
section 341 of Pub. L. 97–320 and by any
regulations issued by the Federal Home
Loan Bank Board implementing section 341.
(ii) In the case of a contract involving a long-term (greater than fifteen
years), fixed rate first mortgage loan
which was made or assumed, including
a transfer of the liened property subject to the loan, during the period beginning on the date a State adopted a
constitutional provision or statute prohibiting the exercise of due-on-sale
clauses, or the date on which the highest court of such state has rendered a
decision (or if the highest court has not
so decided, the date on which the next
highest court has rendered a decision
resulting in a final judgment if such
decision applies statewide) prohibiting
such exercise, and ending on October
15, 1982, a Federal credit union may exercise a due-on-sale clause in the case
of a transfer which occurs on or after
November 18, 1982, unless exercise of
the due-on-sale clause would be based
on any of the following:
(A) The creation of a lien or other encumbrance subordinate to the lender’s
security instrument which does not relate to a transfer of rights of occupancy in the property;
(B) The creation of a purchase money
security interest for household appliances;

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National Credit Union Administration

§ 701.21

(C) A transfer by devise, descent, or
operation of law on the death of a joint
tenant or tenant by the entirety;
(D) The granting of a leasehold interest of 3 years or less not containing an
option to purchase;
(E) A transfer to a relative resulting
from the death of a borrower;
(F) A transfer where the spouse or
children of the borrower become an
owner of the property;
(G) A transfer resulting from a decree
of a dissolution of marriage, a legal
separation agreement, or from an incidental property settlement agreement,
by which the spouse of the borrower becomes an owner of the property;
(H) A transfer into an inter vivos
trust in which the borrower is and remains a beneficiary and which does not
relate to a transfer of rights of occupancy in the property; or
(I) Any other transfer or disposition
described in regulations promulgated
by the Federal Home Loan Bank Board.
(7) Assumption of real estate loans by
nonmembers. A Federal credit union
may permit a nonmember to assume a
member’s mortgage loan in conjunction with the nonmember’s purchase of
the member’s principal residence, provided that the nonmember assumes
only the remaining unpaid balance of
the loan, the terms of the loan remain
unchanged, and there is no extension of
the original maturity date specified in
the loan agreement with the member.
An assumption is impermissible if the
original loan was made with the intent
of having a nonmember assume the
loan.
(h) Third-party servicing of indirect vehicle loans. (1) A federally insured credit union must not acquire any vehicle
loan, or any interest in a vehicle loan,
serviced by a third-party servicer if the
aggregate amount of vehicle loans and
interests in vehicle loans serviced by
that third-party servicer and its affiliates would exceed:
(i) 50 percent of the credit union’s net
worth during the initial thirty months
of that third-party servicing relationship; or
(ii) 100 percent of the credit union’s
net worth after the initial thirty
months of that third-party servicing
relationship.

(2) Regional directors may grant a
waiver of the limits in paragraph (h)(1)
of this section to permit greater limits
upon written application by a credit
union. In determining whether to grant
or deny a waiver, a regional director
will consider:
(i) The credit union’s understanding
of the third-party servicer’s organization, business model, financial health,
and the related program risks;
(ii) The credit union’s due diligence
in monitoring and protecting against
program risks;
(iii) If contracts between the credit
union and the third-party servicer
grant the credit union sufficient control over the servicer’s actions and provide for replacing an inadequate
servicer; and
(iv) Other factors relevant to safety
and soundness.
(3) A regional director will provide a
written determination on a waiver request within 45 calendar days after receipt of the request; however, the 45day period will not begin until the requesting credit union has submitted all
necessary information to the regional
director. If the regional director does
not provide a written determination
within the 45-day period the request is
deemed denied. A credit union may request the regional director to reconsider a denied waiver request and/or
file an appeal with the NCUA Board in
accordance with the procedures set
forth in subpart B to part 746 of this
chapter.
(4) For purposes of paragraph (h) of
this section:
(i) The term ‘‘third-party servicer’’
means any entity, other than a federally-insured depository institution or a
wholly-owned subsidiary of a federallyinsured depository institution, that receives any scheduled, periodic payments from a borrower pursuant to the
terms of a loan and distributes payments of principal and interest and any
other payments with respect to the
amounts received from the borrower as
may be required pursuant to the terms
of the loan. The term also excludes any
servicing entity that meets the following three requirements:
(A) Has a majority of its voting interests owned by federally-insured
credit unions;

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§ 701.21

12 CFR Ch. VII (1–1–20 Edition)

(B) Includes in its servicing agreements with credit unions a provision
that the servicer will provide NCUA
with complete access to its books and
records and the ability to review its internal controls as deemed necessary by
NCUA in carrying out NCUA’s responsibilities under the Act; and
(C) Has its credit union clients provide a copy of the servicing agreement
to their regional directors.
(ii) The term ‘‘its affiliates,’’ as it relates to the third-party servicer, means
any entities that:
(A) Control, are controlled by, or are
under common control with, that
third-party servicer; or
(B) Are under contract with that
third-party servicer or other entity described in paragraph (h)(4)(ii)(A) of this
section.
(iii) The term ‘‘vehicle loan’’ means
any installment vehicle sales contract
or its equivalent that is reported as an
asset under generally accepted accounting principles. The term does not
include:
(A) Loans made directly by a credit
union to a member, or
(B) Loans in which neither the thirdparty servicer nor any of its affiliates
are involved in the origination, underwriting, or insuring of the loan or the
process by which the credit union acquires its interest in the loan.
(iv) The term ‘‘net worth’’ means the
retained earnings balance of the credit
union at quarter end as determined
under generally accepted accounting
principles and as further defined in
§ 702.2(f) of this chapter.
(i) Put option purchases in managing
increased interest-rate risk for real estate
loans produced for sale on the secondary
market—(1) Definitions. For purposes of
§ 701.21(i):
(i) Financial options contract means an
agreement to make or take delivery of
a standardized financial instrument
upon demand by the holder of the contract at any time prior to the expiration date specified in the agreement,
under terms and conditions established
either by:
(A) A contract market designated for
trading such contracts by the Commodity Futures Trading Commission,
or

(B) By a Federal credit union and a
primary dealer in Government securities that are counterparties in an overthe-counter transaction.
(ii) FHLMC security means obligations or other securities which are or
ever have been sold by the Federal
Home Loan Mortgage Corporation pursuant to section 305 or 306 of the Federal Home Loan Mortgage Corporation
Act (12 U.S.C. 1454 and 1455).
(iii) FNMA security means an obligation, participation, or any instrument
of or issued by, or fully guaranteed as
to principal and interest by, the Federal National Mortgage Association.
(iv) GNMA security means an obligation, participation, or any instrument
of or issued by, or fully guaranteed as
to principal and interest by, the Government National Mortgage Association.
(v) Long position means the holding of
a financial options contract with the
option to make or take delivery of a financial instrument.
(vi) Primary dealer in Government securities means:
(A) A member of the Association of
Primary Dealers in United States Government Securities; or
(B) Any parent, subsidiary, or affiliated entity of such primary dealer
where the member guarantees (to the
satisfaction of the FCU’s board of directors) over-the-counter sales of financial options contracts by the parent, subsidiary, or affiliated entity to a
Federal credit union.
(vii) Put means a financial options
contract which entitles the holder to
sell, entirely at the holder’s option, a
specified quantity of a security at a
specified price at any time until the
stated expiration date of the contract.
(2) Permitted options transactions. A
Federal credit union may, to manage
risk of loss through a decrease in value
of its commitments to originate real
estate loans at specified interest rates,
enter into long put positions on GNMA,
FNMA, and FHLMC securities:
(i) If the real estate loans are to be
sold on the secondary market within
ninety (90) days of closing;
(ii) If the positions are entered into:
(A) Through a contract market designated by the Commodity Futures

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National Credit Union Administration

§ 701.22

Trading Commission for trading such
contracts, or
(B) With a primary dealer in Government securities;
(iii) If the positions are entered into
pursuant to written policies and procedures which are approved by the Federal credit union’s board of directors,
and include, at a minimum:
(A) The Federal credit union’s strategy in using financial options contracts and its analysis of how the strategy will reduce sensitivity to changes
in price or interest rates in its commitments to originate real estate loans at
specified interest rates;
(B) A list of brokers or other intermediaries through which positions may
be entered into;
(C) Quantitative limits (e.g., position
and stop loss limits) on the use of financial options contracts;
(D) Identification of the persons involved in financial options contract
transactions, including a description of
these persons’ qualifications, duties,
and limits of authority, and description of the procedures for segregating
these persons’ duties,
(E) A requirement for written reports
for review by the Federal credit union’s
board of directors at its monthly meetings, or by a committee appointed by
the board on a monthly basis, of:
(1) The type, amount, expiration
date, correlation, cost of, and current
or projected income or loss from each
position closed since the last board review, each position currently open and
current gains or losses from such positions, and each position planned to be
entered into prior to the next board review;
(2) Compliance with limits established on the policies and procedures;
and
(3) The extent to which the positions
described contributed to reduction of
sensitivity to changes in prices or interest rates in the Federal credit
union’s commitments to originate real
estate loans at a specified interest
rate; and
(iv) If the Federal credit union has
received written permission from the
appropriate NCUA Regional Director to
engage in financial options contracts
transactions in accordance with this

§ 701.21(i) and its policies and procedures as written.
(3) Recordkeeping and reporting. (i)
The
reports
described
in
§ 701.21(i)(2)(iii)(E) for each month must
be submitted to the appropriate NCUA
Regional Office by the end of the following month. This monthly reporting
requirement may be waived by the appropriate NCUA Regional Director on a
case-by-case basis for those Federal
credit unions with a proven record of
responsible use of permitted financial
options contracts.
(ii)
The
records
described
in
§ 701.21(i)(2)(iii)(E) must be retained for
two years from the date the financial
options contracts are closed.
(4) Accounting. A federal credit union
must account for financial options contracts transactions in accordance with
generally accepted accounting principles.
[49 FR 30685, Aug. 1, 1984]
EDITORIAL NOTE: For FEDERAL REGISTER citations affecting § 701.21, see the List of CFR
Sections Affected, which appears in the
Finding Aids section of the printed volume
and at www.govinfo.gov.
EFFECTIVE DATE NOTE: At 80 FR 66706, Oct.
29, 2015, § 701.21 was amended in paragraph
(h)(4)(iv) by removing ‘‘§ 702.2(f)’’ and adding
‘‘§ 702.2’’ in its place, effective Jan. 1, 2019. At
83 FR 55467, Nov. 6, 2018, the effective date
was delayed until Jan. 1, 2020. At 84 FR 68781,
Dec. 17, 2019, the effective date was further
delayed until Jan. 1, 2022.

§ 701.22

Loan participations.

This section applies only to loan participations as defined in paragraph (a)
of this section. It does not apply to the
purchase of an investment interest in a
pool of loans. This section establishes
the requirements a federally insured
credit union must satisfy to purchase a
participation in a loan. This section
applies only to a federally insured
credit union’s purchase of a loan participation where the borrower is not a
member of that credit union and where
a continuing contractual obligation between the seller and purchaser is contemplated. Generally, a federal credit
union’s purchase of all or part of a loan
made to one of its own members, subject to a limited exception for certain
well capitalized federal credit unions in

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