Financial innovation: Recent changes to loan participations

At its September 2023 meeting, the NCUA board unanimously approved a final rule that would amend NCUA’s existing regulations to make it easier for credit unions to work with third-parties in the lending space, such as financial technology (FinTech) companies. The rule took effect on October 30, 2023. NAFCU’s Regulatory Affairs team has published a members-only final regulation summary of this final rule. Let’s review some of the compliance implications of these recent changes:

Loan participations

This week’s blog will focus on the effect these changes will have on “loan participation,” which are covered by section 701.22 of the NCUA regulations. Generally speaking, a loan participation occurs whenever the ownership interests in a loan is divided up and sold. Under section 701.22, federally insured credit unions (FICUs) can buy participation interests in loans under certain conditions. The regulation requires that there be a written loan participation agreement, which must meet certain requirements. Additionally, the rule requires that the originating lender must retain an interest in the loan – at least 5 or 10 percent, depending on institution type – for the life of the loan. While section 701.22 focuses on purchasing participation interests, FICUs are also permitted to sell interests in loans they’ve made (but an FICUs which purchase those interests would be subject to the purchasing requirements of section 701.22).


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