67570 Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / Rules and Regulations 

1Note that the terms credit union, federal credit 

union, federally insured, state-chartered credit 

union, corporate credit union, and FICU are used 

throughout the document and are not necessarily 

interchangeable. Specifically, while § 701.23 

applies to federal credit unions (FCUs) only, 

§ 701.22 applies to all federally insured consumer 

credit unions, and § 701.21 has provisions that 

apply to all federally insured credit unions. 

2NCUA Legal Op. 15–0813 (Aug. 10, 2015) 

available at https://www.ncua.gov/regulationsupervision/legal-opinions/2015/loanparticipations-indirect-loans-originating-lenders. 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Parts 701 and 714 

[NCUA–2022–0185] 

RIN 3133–AF49, 3133–AE96 

Financial Innovation: Loan 

Participations, Eligible Obligations, 

and Notes of Liquidating Credit Unions 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final rule. 

SUMMARY: The NCUA Board (Board) is 

amending the NCUA’s regulations 

regarding the purchase of loan 

participations and the purchase, sale, 

and pledge of eligible obligations and 

other loans (including notes of 

liquidating credit unions). The final rule 

clarifies the NCUA’s current regulations 

and provides additional flexibility for 

federally insured credit unions (FICUs) 

to make use of advanced technologies 

and opportunities offered by the 

financial technology (fintech) sector. 

The final rule also amends the NCUA’s 

rule regarding loans to members and 

lines of credit to members by adding 

new provisions about indirect lending 

arrangements and indirect leasing 

arrangements. Finally, the final rule 

makes certain conforming changes and 

technical amendments to the NCUA’s 

regulations. The Board does not view 

the conforming changes and technical 

amendments as substantive. 

DATES: This final rule is effective 

October 30, 2023. 

FOR FURTHER INFORMATION CONTACT: For 

policy questions: Naghi Khaled, Director 

of Credit Markets, the Office of 

Examination and Insurance, at (703) 

518–6360; for legal questions: Frank 

Kressman, General Counsel, the Office 

of General Counsel, at (703) 518–6540; 

or by mail at National Credit Union 

Administration, 1775 Duke Street, 

Alexandria, VA 22314. 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Introduction 

On December 30, 2022, the Board 

issued a proposed rule to amend 

§§ 701.21, 701.22, 701.23, and part 714 

of the NCUA’s regulations regarding the 

purchase of loan participations and the 

purchase, sale, and pledge of eligible 

obligations and other loans (including 

notes of liquidating credit unions).1 The 

Board intended the proposal to provide 

FICUs with additional flexibility to 

make use of advanced technologies and 

opportunities offered by the fintech 

sector. In addition, the proposed 

amendments were intended to clarify 

ambiguities related to loan 

participations and eligible obligations 

and shift from a prescriptive to a more 

principles-based approach in certain 

areas. 

The Board believes shifting to a more 

principles-based approach with respect 

to loan participations and eligible 

obligations is appropriate and will be 

beneficial to FICUs. The intent behind 

the final rule is to advance the NCUA’s 

efforts to strike an appropriate balance 

between mitigating risk to the National 

Credit Union Share Insurance Fund 

(Share Insurance Fund), protecting 

credit union members, and fostering 

growth and stability in the credit union 

system by removing certain prescriptive 

limits and other qualifying conditions, 

and replacing them with risk-focused, 

principles-based requirements. The 

proposed shift to more principles-based 

requirements is intended to provide 

FICUs with additional flexibility to 

innovate in terms of how they manage 

their balance sheets while offering new 

or enhanced services to their members. 

The Board believes the proposed 

changes will increase FICUs’ ability to 

engage in lending arrangements with 

other financial institutions and third 

parties, including fintech companies 

providing lending services, and expand 

their access to diverse loan origination 

channels, new markets, including the 

underserved, and potential new services 

for their members. 

B. Summary of the Final Rule 

The Board is now amending the 

NCUA’s regulations regarding the 

purchase of loan participations and the 

purchase, sale, and pledge of eligible 

obligations and other loans (including 

notes of liquidating credit unions). The 

final rule adopts the amendments 

largely as proposed with a few changes, 

which are discussed in the section-bysection analysis of the preamble below. 

The final rule relocates and clarifies the 

NCUA’s provisions regarding indirect 

lending and indirect leasing. The final 

rule also provides credit unions with 

additional flexibility to participate in 

loans acquired through indirect lending 

arrangements, allowing FICUs to use 

advanced technologies and 

opportunities offered by the fintech 

sector. In addition, the final rule 

removes certain prescriptive limitations 

and other qualifying requirements 

relating to eligible obligations and 

provides credit unions with additional 

flexibility to purchase eligible 

obligations of their members. 

Removing the prescriptive limitations 

and other qualifying requirements is 

intended to allow FCUs additional 

flexibility to engage with the advanced 

technologies and other opportunities 

offered by the fintech sector. The greater 

flexibility and individual autonomy will 

also allow FCUs to establish their own 

risk tolerance limits and governance 

policies for these activities provided 

they are safe and sound given the FCU’s 

financial and operational capabilities, 

while codifying due diligence, risk 

assessment, compliance and other 

management processes that are 

consistent with the Board’s longstanding expectations for safe, sound, 

fair, and affordable lending practices. 

As discussed in greater detail in the 

section-by-section analysis of the 

preamble, the final rule amends § 701.21 

of the NCUA’s regulations to add new 

paragraph (c)(9) regarding indirect 

lending and indirect leasing 

arrangements. The new paragraph 

replaces the language defining indirect 

lending and indirect leasing 

arrangements under current 

§ 701.23(b)(4)(iv). 

The final rule also amends § 701.22 of 

the NCUA’s regulations. In particular, 

the final rule makes certain clarifying 

amendments to the introductory 

paragraph, and codifies NCUA Legal 

Opinion 15–0813, Loan Participations 

in Indirect Loans—Originating Lender.2

The codification of Legal Opinion 15– 

0813 clarifies that a FICU engaged in an 

indirect lending relationship can meet 

the definition of ‘‘originating lender’’ 

under § 701.22 of the NCUA’s 

regulations, provided the FICU meets 

certain conditions. For purposes of 

§ 701.22, a FICU is considered the 

originating lender if the FICU makes the 

final underwriting decision regarding 

the loan, and the loan is assigned to the 

purchaser very soon after the inception 

of the obligation to extend credit. 

In addition, the final rule amends 

§ 701.23 of the NCUA’s current 

regulations as follows: 

• Makes clarifying and conforming 

amendments to the introductory 

paragraph. 

• Removes the CAMELS ratings and 

well-capitalized requirements under 


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3 5 U.S.C. 553(d). 

4 12 U.S.C. 1766(a) (The Board may prescribe 

rules and regulations for the administration of 12 

U.S.C. chapter 14 (including, but not by way of 

limitation, the merger, consolidation, and 

dissolution of corporations organized under the 

chapter). Any central credit union chartered by the 

Board shall be subject to such rules, regulations, 

and orders as the Board deems appropriate and, 

except as otherwise specifically provided in such 

rules, regulations, or orders, shall be vested with or 

subject to the same rights, privileges, duties, 

restrictions, penalties, liabilities, conditions, and 

limitations that would apply to all Federal credit 

unions under the chapter.). 

5Sections 1751-1795k. 

6Section 1789(11) (providing in relevant part as 

follows: ‘‘In carrying out the purposes of this 

subchapter, the Board may—[. . .] prescribe such 

rules and regulations as it may deem necessary or 

appropriate to carry out the provisions of [12 U.S.C. 

1781–1790e].’’). 

7See section 1786(r) (providing that for purposes 

of the FCU Act, the term ‘‘institution-affiliated 

party’’ means—(1) any committee member, director, 

officer, or employee of, or agent for, an insured 

credit union; (2) any consultant, joint venture 

partner, and any other person as determined by the 

Board (by regulation or on a case-by-case basis) who 

participates in the conduct of the affairs of an 

insured credit union; and (3) any independent 

contractor (including any attorney, appraiser, or 

accountant) who knowingly or recklessly 

participates in—(A) any violation of any law or 

regulation; (B) any breach of fiduciary duty; or (C) 

any unsafe or unsound practice, which caused or 

is likely to cause more than a minimal financial loss 

to, or a significant adverse effect on, the insured 

credit union.). 

8Section 1786. 

9Section 1757(5)(e). 

10 Id. 

11Section 1757(13). 

paragraph (b)(2) for FCU purchases of 

certain non-member loans from FICUs. 

• Narrows the application of the 5- 

percent limit on the purchase of eligible 

obligations to cover only purchases of 

notes of liquidating credit unions. 

• Adds safety and soundness 

requirements to paragraph (b)(6)(i)–(vi) 

concerning the purchase of eligible 

obligations, to offset risks associated 

with removing the CAMELS ratings and 

well-capitalized requirements from 

paragraph (b)(2). Safety and soundness 

requirements would apply to all FCUs 

engaged in the purchase of eligible 

obligations and notes from a liquidating 

credit union. In particular, the final rule 

requires an FCU purchasing eligible 

obligations or notes from a liquidating 

credit union to comply with the 

following: 

Æ Establish written, board-approved 

policies, risk assessments, and risk 

management processes that are 

commensurate with the size, scope, 

type, complexity, and level of risk posed 

by the planned purchase activities. 

These policies would include 

underwriting standards for the loans, 

ongoing performance and risk 

monitoring, including compliance risk, 

tailored to the types of loans purchased 

and the sellers as applicable, and 

portfolio concentration limits by loan 

types and risk categories in relation to 

net worth; 

Æ Conduct due diligence on a seller 

prior to a purchase; 

Æ Include certain contract language 

and provisions in the written loan 

purchase agreements (similar to the 

standards currently established for loan 

participation agreements under § 701.22 

of the NCUA’s regulations); and 

Æ Address in internal written 

purchase policies when a legal review of 

agreements or contracts will be 

performed to ensure that the legal and 

business interests of the credit union are 

protected against undue risk. 

• Revises the definition of ‘‘eligible 

obligation’’ under paragraph (a)(1) to 

clarify the distinction between 

transactions treated as loan 

participations and those treated as 

eligible obligations. 

• Revises the applicability of the 5- 

percent limitation under current 

paragraph (b)(4) to cover only ‘‘notes’’ 

purchased by an FCU from a liquidating 

credit union. 

• Revises the ‘‘grandfathered 

purchases’’ section to include eligible 

obligation purchases that were executed 

before the effective date of this final 

rule, provided the purchases complied 

with the version of the rule that was 

effective at the time the transaction was 

executed, and subject to safety and 

soundness and other compliance 

considerations. 

• Adds safety and soundness 

requirements to paragraph (c) 

concerning the sale of eligible 

obligations, requiring the selling FCU to 

do the following: 

Æ Obtain a review and assessment of 

all applicable loan sale agreements or 

contracts to protect the FCU’s legal and 

business interests; and 

Æ Identify the specific loan(s) being 

sold either directly in the written loan 

sale agreement or through a document 

incorporated by reference into the loan 

sale agreement. 

The final rule also amends § 714.9 of 

the NCUA’s regulations to make certain 

non-substantive amendments related to 

changes to current § 701.23(b)(4)(iv). 

Finally, the final rule also makes 

certain conforming changes and 

technical amendments in other sections 

of the NCUA’s regulations. The Board 

does not view these additional 

conforming technical changes as 

substantive. 

C. Effective Date 

Under the Administrative Procedure 

Act, the NCUA is generally required to 

provide a minimum of 30 days from the 

date of publication in the Federal 

Register before a final rule becomes 

effective.3 The final rule will become 

effective 30 days after the date of 

publication in the Federal Register so it 

can go into effect as quickly as possible 

to give credit unions prompt access to 

the numerous beneficial changes it 

makes. 

II. Legal Authority 

Section 120(a) 4 of the Federal Credit 

Union Act (Act) authorizes the Board to 

prescribe rules and regulations for the 

administration of the Act.5 Similarly, 

section 209 6 of the Act authorizes the 

Board to prescribe such rules and 

regulations as it may deem necessary or 

appropriate to carry out the share 

insurance provisions of subchapter II of 

the Act. In addition, section 206 of the 

Act provides the Board with broad 

authority to take enforcement action 

against a FICU or an ‘‘institutionaffiliated party’’ 7 that is engaging or has 

engaged, or the Board has reasonable 

cause to believe is about to engage, in 

an unsafe or unsound practice in 

conducting the business of such credit 

union.8 Congress chose not to define 

‘‘unsafe or unsound practices’’ in the 

Act, leaving determinations regarding 

which actions are unsafe or unsound to 

the Board. 

Section 107(5)(E) of the Act 

authorizes FCUs to engage in 

participation lending with other credit 

unions, credit union organizations, or 

financial organizations in accordance 

with written policies of the credit 

union’s board of directors.9 Section 

107(5)(E) also provides that an FCU that 

originates a loan for which participation 

arrangements are made in accordance 

with this subsection shall retain an 

interest of at least 10 per centum of the 

face amount of the loan.10

Section 107(13) of the Act authorizes 

FCUs, in accordance with rules and 

regulations prescribed by the Board, to 

purchase, sell, pledge, or discount or 

otherwise receive or dispose of, in 

whole or in part, any eligible obligation 

(as defined by the Board) of its 

members.11 In addition, section 107(13) 

authorizes FCUs, in accordance with 

rules and regulations prescribed by the 

Board, to purchase from any liquidating 

credit union notes made by individual 

members of the liquidating credit union 

at such prices as may be agreed upon by 

the board of directors of the liquidating 

credit union and the board of directors 

of the purchasing credit union, but no 

purchase may be made under authority 

of this paragraph if, upon the making of 

that purchase, the aggregate of the 

unpaid balances of notes purchased 


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12 Id. 

13Section 1757(14). 

under authority of this paragraph would 

exceed 5 per centum of the unimpaired 

capital and surplus of the credit 

union.12

Section 107(14) of the Act authorizes 

FCUs, subject to regulations of the 

Board, to sell all or a part of their assets 

to another credit union, to purchase all 

or part of the assets of another credit 

union, and to assume the liabilities of 

the selling credit union and those of its 

members.13

III. Section-by-Section Analysis of the 

Final Rule and Comments on the 

Proposal 

The NCUA received 42 unique 

comment letters on the proposed rule. 

In general, the overwhelming majority 

of commenters strongly supported the 

proposed rule and agreed with the 

NCUA regarding the need for and the 

rationale supporting the proposed 

changes. The commenters also agreed 

with the proposal’s shift toward more 

principles-based regulations and 

suggested the proposed changes would 

allow credit unions to be nimble in the 

future. Accordingly, the Board is now 

issuing this final rule to adopt the 

amendments proposed with certain 

changes that are discussed in more 

detail in the parts of the preamble below 

corresponding with the amended 

sections. 

The NCUA has summarized the 

comments received that were within the 

scope of this rulemaking under the parts 

of the preamble below corresponding 

with the amended sections and 

subsections. The NCUA received many 

comments that were outside the scope 

of this rulemaking. The NCUA has read 

and is considering the comments 

beyond the scope of this rule for future 

rulemakings. Most of the comments 

received that go beyond the scope of the 

proposal, even if summarized, are not 

specifically responded to by the NCUA 

in the preamble to this final rule. 

A. Part 701 Organization and 

Operation of Federal Credit Unions 

As discussed in more detail below, 

this final rule makes several changes to 

sections in part 701 of the NCUA’s 

regulations. These changes clarify 

numerous provisions regarding loans to 

members and lines of credit to members 

under § 701.21; loan participations 

under § 701.22; and the purchase, sale, 

and pledge of eligible obligations under 

§ 701.23. In addition, the final rule 

amends the NCUA’s current regulatory 

requirements under §§ 701.22 and 

701.23. The amended requirements 

would provide FICUs expanded 

authority and autonomy to innovate and 

transact business with fintech 

companies and other institutions that 

provide services associated with the 

origination and sale of loans made to 

members of FICUs. 

Public Comments 

Several commenters noted that the 

proposed changes would clarify credit 

unions’ loan participation and eligible 

obligation authorities, benefiting not 

only credit unions but also NCUA 

examiners and various other 

stakeholders. In addition, many 

commenters expressly offered support 

for the proposal’s general shift toward a 

more principles-based approach with 

respect to the NCUA’s loan participation 

and eligible obligation regulations. One 

commenter suggested that prescriptive 

regulations, with fixed limits and rules, 

prevent credit unions from evolving 

with shifting market forces (e.g., the rise 

of fintechs). The commenter explained 

further that a principles-based approach 

to risk tolerance and appetite will 

provide the opportunity for credit union 

service organizations (CUSOs) to create 

comprehensive underwriting guidelines 

acceptable to all participating credit 

unions, which will allow credit unions 

to collectively compete against banks 

and other financial institutions and be 

more attractive to lending platform 

providers, original automotive 

equipment manufacturers, and point of 

sale retailers. Another commenter 

specifically asked that the Board not 

adopt new prescriptive definitions and 

regulations. The commenter requested 

further that all safety and soundness 

standards imposed in the final rule 

should be sufficiently flexible to permit 

credit unions to adopt internal written 

purchase policy provisions 

commensurate with the size, scope, 

type, complexity, and level of risk posed 

by their individual activities. Several 

commenters requested, generally, that 

the NCUA do more to clarify the rules, 

expand credit unions’ authority in this 

area, or both. 

Discussion 

Consistent with the strong support 

received from commenters, the Board is 

adopting the rule largely as proposed, 

for the reasons set forth in the notice of 

proposed rulemaking, with certain 

changes discussed in the section-bysection analysis below. In addition, 

several commenters requested 

additional clarification on certain 

aspects of the proposal. The NCUA has 

provided further clarifying guidance to 

credit unions where appropriate. 

Section 701.21 Loans to Members and 

Lines of Credit to Members 

Section 701.21(c) General Rules 

As discussed in more detail below, 

this final rule, as a conforming 

amendment, adds new provisions to 

§ 701.21 regarding indirect lending 

arrangements and indirect leasing 

arrangements. The new provisions take 

the place of a provision in current 

§ 701.23, which will be removed as part 

of this final rule. 

Public Comments 

Most commenters offered support for 

the proposed changes to the NCUA’s 

regulations regarding indirect lending 

and indirect leasing arrangements, 

agreed the proposed changes would 

provide additional clarification to 

affected parties, and supported moving 

the provisions to § 701.21. Moreover, 

three commenters agreed with the 

NCUA’s assessment that the proposed 

changes to the definitions of ‘‘indirect 

lending arrangements’’ and ‘‘indirect 

leasing arrangements’’ are unlikely to 

have a material impact on credit unions’ 

existing and future indirect lending or 

indirect leasing arrangements. Another 

commenter agreed that the proposed 

definitions use language that, while 

generally similar to the language in 

current § 701.23(b)(4)(iv), provides 

much needed, common-sense 

clarification to both terms. 

Discussion 

Consistent with the support received 

from commenters on the proposal, the 

Board is adopting new paragraph (c)(9) 

to § 701.21 regarding the indirect loans 

and indirect leasing arrangements as 

proposed for the reasons set forth in the 

notice of proposed rulemaking. 

Although not raised by commenters, the 

final rule also adds language and a cross 

citation to § 714.2(b) to direct readers to 

new § 701.21(c)(9) and alert them to the 

relationship between paragraph (c)(9) 

and part 714 of the NCUA’s regulations 

regarding leasing. No substantive 

change to the NCUA’s regulations is 

intended by this addition. This addition 

is discussed in more detail in the part 

of the preamble associated with part 714 

of the final rule. 

New § 701.21(c)(9) Indirect Lending and 

Indirect Leasing Agreements 

For reasons discussed in the preamble 

discussion on current § 701.23(b)(4), the 

NCUA is deleting current paragraph 

(b)(4)(iv) regarding indirect lending. 

Current § 701.23(b)(4)(iv) excludes 

certain loans acquired through indirect 

lending arrangements and indirect 

leasing arrangements from the 5-percent 


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Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / Rules and Regulations 67573 

14See, e.g., NCUA Legal Op. 97–0546 (Aug. 6, 

1997), available at https://www.ncua.gov/ 

regulation-supervision/legal-opinions/1997/ 

indirect-lending. 

15Available at https://www.merriamwebster.com/dictionary/inception. 

limit on the aggregate of the unpaid 

balance of certain loans purchased 

under § 701.23. While the language 

excluding loans and leases acquired 

through indirect lending and indirect 

leasing arrangements is no longer 

needed in § 701.23(b)(4), the definition 

of such arrangements is still relevant for 

purposes of other provisions in the 

NCUA’s regulations. Under current 

paragraph (b)(4), and NCUA’s longstanding interpretation,14 loans 

acquired by an FCU pursuant to an 

indirect lending arrangement are 

considered loans made by the FCU 

under § 701.21, rather than loans 

purchased under § 701.23. Accordingly, 

the Board is adding new paragraph 

(c)(9) regarding indirect lending and 

indirect leasing arrangements to 

§ 701.21. The paragraph replaces the 

language defining indirect lending and 

indirect leasing arrangements under 

current § 701.23(b)(4)(iv). 

New § 701.21(c)(9)(i) Definitions 

New § 701.21(c)(9)(i) would define the 

terms ‘‘indirect leasing arrangement’’ 

and ‘‘indirect lending arrangement’’ for 

purposes of the NCUA’s regulations. 

Current § 701.23(b)(4)(iv) provides that 

an indirect lending or indirect leasing 

arrangement that is classified as a loan 

and not the purchase of an eligible 

obligation because the FCU makes the 

final underwriting decision, and the 

sales or lease contract is assigned to the 

FCU very soon after it is signed by the 

member and the dealer or leasing 

company, is excluded in calculating the 

5-percent limit. The NCUA believes 

splitting the provision in paragraph 

(b)(4)(iv) into two definitions will help 

clarify the existing requirements. 

Accordingly, new § 701.21(c)(9)(i) 

provides that the term indirect leasing 

arrangement means a written agreement 

to purchase leases from the leasing 

company where the purchaser makes 

the final underwriting decision, and the 

lease agreement is assigned to the 

purchaser very soon after it is signed by 

the member and the leasing company. 

New paragraph (c)(9)(i) would provide 

further that the term indirect lending 

arrangement means a written agreement 

to purchase loans from the loan 

originator where the purchaser makes 

the final underwriting decision 

regarding making the loan, and the loan 

is assigned to the purchaser very soon 

after the inception of the obligation to 

extend credit. 

Both new definitions would use 

language that is generally similar, but 

not identical, to the language in current 

§ 701.23(b)(4)(iv). The NCUA is revising 

the language used in current paragraph 

(b)(4)(iv) to clarify the different 

requirements that apply to indirect 

leasing arrangements and indirect 

lending arrangements. The amendments 

are not intended to change the current 

meaning of both terms. The Board 

specifically requested comment on 

whether proposed paragraph (c)(9) 

would have a material impact on credit 

unions’ existing and future indirect 

lending arrangements, indirect leasing 

arrangements, or both. 

Public Comments 

One commenter recommended 

clarifying the meaning of the phrase 

‘‘inception of the obligation to extend 

credit.’’ The commenter asked, as an 

example of its confusion about the 

meaning of the phrase, does this mean 

when the credit union verifies 

underwriting criteria, when the 

borrower has a sufficient credit score 

according to the credit union, or some 

other step in the process of extending 

credit? 

Discussion 

The Board believes the phrase 

‘‘inception of the obligation to extend 

credit’’ is clear and unambiguous. 

Merriam-Webster’s Online Dictionary 

defines the term ‘‘inception’’ as ‘‘an act, 

process, or instance of beginning: 

COMMENCEMENT.’’ 15 The inception 

of the obligation to extend credit, then, 

is the point in time when the indirect 

lender becomes obligated to extend 

credit to the borrower. As with all its 

rules, however, the Board will monitor 

implementation and provide additional 

clarifying guidance as it deems 

necessary. 

Should the Board further clarify the 

term ‘‘final underwriting decision’’? The 

Board invited comments in the proposal 

on what it means for the credit union to 

make the final underwriting decision 

regarding making the loan in an indirect 

lending arrangement. For example, 

should the rule specify that a credit 

union in an indirect lending 

arrangement must be involved or 

consulted at the time of the extension of 

credit? In the alternative, should the 

rule specify that a credit union can 

simply provide its underwriting 

standards to the other party in the 

indirect lending arrangement and clarify 

in the indirect lending agreement that 

only those loans meeting the credit 

union’s underwriting standards will be 

accepted for funding? Would a credit 

union still be making the final 

underwriting decision if a third party 

includes significantly more 

underwriting criteria that are more 

restrictive, for example, than the credit 

union requires? 

Public Comments 

In response to NCUA’s question in the 

proposed rule preamble, two 

commenters responded that the NCUA 

should not define the phrase ‘‘final 

underwriting decision.’’ One of those 

commenters explained that the 

implementation of additional 

requirements through a definition could 

stifle innovation as new products are 

created and/or create unintended 

regulatory burden that may be 

unnecessary due to the specifics of the 

underwriting situation. Another 

commenter responded that, if the credit 

union has provided its guidelines or 

other underwriting criteria and has the 

ability to not approve or not fund a loan 

that does not meet its criteria, there is 

no need to make the definition more 

specific. A third commenter suggested 

that the current safety and soundness 

requirements are sufficient to enable a 

credit union to identify, isolate, and 

resolve any issues the credit union may 

later discover. 

On the other hand, two commenters 

asked that the NCUA define the phrase 

‘‘final underwriting decision.’’ One of 

those commenters recommended the 

phrase be defined to avoid ambiguity or 

potential conflict with existing laws and 

regulations that require the loan 

originator to make the final 

underwriting decision, and situations 

involving prearranged underwriting and 

processing agreements between thirdparty originators and the purchasing 

credit unions. The commenter 

recommended further that the definition 

allow the seller (loan originator) to use 

the purchasing credit union’s 

underwriting guidelines. Another 

commenter recommended defining the 

phrase to clarify that the purchasing 

FCU is considered to have made the 

‘‘final underwriting decision’’ so long as 

the loan conforms to the FCU’s preapproved underwriting criteria, even 

when a fintech company or other 

indirect lending partner adds 

additional, more restrictive 

underwriting criteria than the FCU 

requires. In the commenter’s opinion, 

the indirect lending partner is acting as 

a facilitator on behalf of the credit union 

in such cases to provide credit 

enhancements and is not overriding the 

credit union’s underwriting criteria. The 

commenter also suggested that indirect 


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16See, e.g., NCUA Legal Op. 92–1203 (Jan. 5, 

1993); NCUA Legal Op. 92–1203 (May 11, 1993); 

NCUA Legal Op. 97–0546 (Aug. 6, 1997), available 

at https://ncua.gov/regulation-supervision/legalopinions; and § 701.23(b)(4)(iv). 

17NCUA Legal Op. 97–0546. 

18See id.; see also 63 FR 70997, 70997 (Dec. 23, 

1998) (agreeing with commenters that credit or 

electronic scoring by a third-party vendor using the 

credit union’s criteria is consistent with the FCU 

making the final underwriting decision). 

19See id. 

lending partners weeding out bad loans 

in this fashion promotes safety and 

soundness by reducing credit risk to 

FCUs, whether the indirect lender uses 

an algorithm, natural persons’ judgment, 

or both to provide such credit 

enhancements. To clarify this point, the 

commenter recommended the definition 

of ‘‘final underwriting decision’’ in 

§ 701.21(c)(9)(i) provide as follows: 

The FCU makes the ‘‘final 

underwriting decision’’ so long as: 

(1) The FCU establishes by contract that 

the indirect lending partner must adhere to 

the underwriting standards set forth in the 

indirect lending agreement; these 

underwriting standards are typically 

included as an appendix or exhibit to the 

master agreement for the indirect lending 

relationship; and 

(2) The indirect lending partner can apply 

additional, more restrictive underwriting 

criteria that go above-and-beyond the FCU’s 

underwriting requirements, whether those 

additional underwriting criteria are part of an 

automated loan underwriting system and/or 

are performed by a natural person individual 

who is not involved in the disbursement of 

loan funds. 

Several commenters did not expressly 

recommend defining the phrase ‘‘final 

underwriting decision,’’ but did offer 

recommendations about how the term 

should be interpreted. Three 

commenters asked that credit unions be 

allowed to charge third-party partners 

with prescribed standards that must be 

met and manage the risk of the 

engagement through due diligence and 

oversight. One of those commenters 

asked further that credit unions then be 

allowed to choose to review loans before 

or after funding, depending on their 

comfort and experience with the thirdparty partner; the expectation being that 

the credit unions be familiar with the 

third party’s underwriting standards 

and where those standards might be 

different (in more or less conservative 

ways) than their own. Finally, the 

commenter suggested that the adequacy 

of a credit union’s due diligence and 

oversight of its third-party partners is a 

safety and soundness issue best left to 

examiners in the field. Another one of 

those commenters suggested that, if the 

NCUA needed to strengthen this part of 

the rule to justify making this change, it 

could consider also adding the 

following express requirements: (1) the 

underwriting standards must be within 

the credit union’s approved 

underwriting and credit policies; (2) the 

underwriting standards must be clearly 

referenced in the representations and 

warranties of the agreement between the 

fintech/flow partner and the credit 

union and, if not met, require 

repurchase of the loans by the fintech/ 

flow partner; and (3) the credit union 

must, as part of best practices and safety 

and soundness considerations, review 

and analyze the indirect loan pools 

prior to settlement or as soon as 

practical (for example, in the early part 

of the month subsequent to the month 

in which the loans were purchased) to 

ensure they are compliant with NCUA 

rules (for example, maturity limits, the 

statutory maximum interest rate, etc.) 

and meet the credit ‘‘stips’’/guidelines 

set forth in the agreement between the 

parties. 

Several commenters also recommend 

that, if the phrase ‘‘final underwriting 

decision’’ is defined, the NCUA not 

require that credit unions engaged in 

indirect lending be actively involved or 

consulted at the time a facilitating 

partner extends credit to borrowers on 

the credit union’s behalf or limit the 

number of permissible facilitating 

partners. The commenters suggested 

such a requirement would be 

logistically challenging and could result 

in fewer loans being made through 

indirect lending arrangements. 

Discussion 

The Board appreciates the detailed 

comments that were submitted 

regarding defining the phrase ‘‘final 

underwriting decision.’’ While the 

comments received in this area go 

beyond the scope of this rulemaking, the 

comments will be retained for 

consideration by the NCUA during 

future rulemakings relating to indirect 

lending. 

The NCUA has long used the act of 

underwriting a loan as a feature to 

distinguish between transactions where 

a FICU makes a loan and transactions 

where a FICU purchases a loan.16 In 

particular, in a 1997 legal opinion the 

NCUA explained: 

FCUs may participate in indirect lending 

arrangements under the authority to make 

loans to members, 12 U.S.C. 107(5); 12 CFR 

701.21, rather than the authority to purchase 

eligible obligations, 12 U.S.C. 107(13); 12 

CFR 701.23, as long as two conditions are 

met. First, the FCU must make the final 

underwriting decision. That is, before the 

retailer and the member complete the loan or 

sales contract, the FCU must review the 

application and determine that the 

transaction conforms to its lending policies. 

This is because an FCU may not delegate its 

lending authority to a third party.17

By requiring the purchasing credit 

union to make the final underwriting 

decision in an indirect lending 

transaction, the NCUA ensures that the 

purchasing credit union is not relying 

on the due diligence of the loan seller 

who might otherwise have had a 

decreased interest in properly 

underwriting the loan knowing it would 

later be sold. 

The NCUA explained further in the 

same 1997 legal opinion that an eligible 

organization may use an automated 

credit scoring system to make its final 

underwriting decision so long as the 

‘‘score’’ obtained from the automated 

system is the sole determinant for 

granting credit. When an eligible 

organization establishes the qualifying 

criteria for the automated scoring 

system, it is effectively making an 

advance decision on a particular 

application.18 So long as the party 

entering the borrower’s application 

information does not exercise any 

judgment regarding that information, 

the score will be deemed to reflect the 

FCU’s lending policies.19

Nothing in current § 701.23(b)(4)(iv) 

or § 701.21(c)(9)(i) of this the final rule, 

however, prohibits an indirect lending 

partner from having its own separate 

underwriting criteria, which it may use 

to screen borrowers before the credit 

union makes its final underwriting 

decision. An indirect lending partner 

may screen applicants for a loan using 

underwriting criteria from multiple 

lending partners; for example, criteria 

such as credit score, debt-to-income or 

debt service coverage ratios, collateral 

loan-to-value ratios, loan terms, and 

interest rates. In such cases, the 

determining factor is not what initial 

underwriting criteria the indirect 

lending partner may have used, but 

whether the credit union made the final 

underwriting decision. Thus, the 

indirect lending partner’s initial 

underwriting criteria may differ from 

the credit union’s underwriting criteria 

but the credit union must make the final 

underwriting decision to ensure the 

loan meets the credit union’s 

underwriting criteria. The Board 

believes that what constitutes making a 

final underwriting decision may 

continue to evolve as credit unions 

implement artificial intelligence and 

machine learning based underwriting 

systems, as well as engage with fintech 

companies. 

In indirect lending situations not 

involving automated credit scoring 

systems, a credit union may not wait 

until after the inception of the 


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20NCUA Legal Op. 97–0546. 

21 63 FR 70997 (Dec. 23, 1998). 

22The preamble to the 1998 proposal to amend 

the eligible obligations rule requested public 

comment on whether NCUA should specify a 

certain number of days as constituting ‘‘very soon.’’ 

63 FR 41976, 41977 (Aug. 6, 1998). After 

considering the comments, however, the NCUA 

Board determined not to specifically define it 

because the Board wanted to provide FCUs with 

flexibility under various circumstances. The NCUA 

Board also clarified that assignment of the loan 

means acceptance of the loan and not necessarily 

the physical receipt of the loan documentation, 

recognizing that acceptance and payment are often 

done electronically. However, physical receipt of 

the loan documents by the FCU should occur 

within a reasonable time following acceptance of 

the loan. 63 FR 70997, 70998 (Dec. 23, 1998). 

23NCUA Legal Op. 15–0813 (Aug. 10, 2015). 

24 Id. 

25 Id. 

26 63 FR 41976, 41977 (Aug. 6, 1998). 

obligation to extend credit to review the 

loan application and determine whether 

the transaction conforms to its lending 

policies because the credit union then 

would not have made the final 

underwriting decision. A credit union 

should retain approval authority to 

engage in indirect lending (that is, 

employees or independent contractors 

working for the indirect lending partner 

cannot make the final underwriting 

decision on the credit union’s behalf).20

For large loans, complex loans, or both, 

a credit union may grant preliminary 

approval of the loan based on the 

indirect lending partner’s 

representations to the credit union’s 

loan officer that the loan conforms to 

the credit union’s underwriting policies. 

The credit union must then review the 

loan application and determine that the 

loan, the application, and the 

transaction conform to its lending 

policies before the credit union grants 

its final approval and before the loan 

proceeds are sent to the indirect lending 

partner. 

In all indirect lending transactions, 

credit unions should also retain the 

right to deny a loan should it discover 

the loan does not comply with the credit 

union’s policies or standards upon 

receipt of the final paperwork. A credit 

union should document this ‘‘right’’ in 

the indirect lending agreement. 

Should the Board define the phrase 

‘‘very soon after’’? The Board asked in 

the proposal whether additional 

clarification was needed such as adding 

certain parameters around the meaning 

of ‘‘very soon after’’ for the assignment 

of the loan or contract to the credit 

union. Examples given were within 7 

days of the borrower executing the loan 

or contract or assignment prior to the 

first loan payment. 

Public Comments 

Three commenters recommend not 

defining the phrase ‘‘very soon after.’’ 

One commenter suggested that using the 

language ‘‘very soon after’’ is 

appropriate and should not cause 

significant issues and that setting a 

specific period is not necessary. 

Another commenter acknowledged that 

timely assignment of a loan or sales 

contract should be a factor in ensuring 

a FICU or other eligible organization is 

prudently engaged in an indirect 

lending arrangement, but suggested the 

FICU or other eligible organization’s 

adherence to relevant safety and 

soundness standards is far more 

determinative of any relevant risks that 

may accrue to the institution or the 

Share Insurance Fund. The commenter 

suggested further that a prescriptive 

loan or sales contract transfer timeline 

could undermine indirect lending 

partnerships the NCUA intends to 

promote. One commenter suggested that 

specifying a prescriptive period could 

be disruptive to the marketplace and put 

additional operational burdens on credit 

unions. The commenter also observed 

that each program between a fintech/ 

flow partner and a credit union for a 

given loan category will have a cadence 

that is different (given purchase timing 

preferences and operational logistics) 

and that, if the timeframe set by 

regulation is too short, it could disrupt 

the credit union’s pre-purchase 

settlement analysis and review process 

of the loan pool. 

Six commenters recommend defining 

the phrase ‘‘very soon after’’ to avoid 

confusion. Four of the commenters 

recommended providing a specific 

number of days following the borrower’s 

execution of the loan or contract. One 

commenter suggested the specific 

number be 5 or 7 business days but not 

a window that is excessive, such as 10 

days. Another commenter suggested the 

number be 7 days. One commenter 

suggested the number be no more than 

7 or 10 days. And one commenter 

suggested the number be 30 days or less. 

Two commenters recommend 

defining ‘‘very soon after’’ more 

generally to mean prior to the due date 

of the member’s first loan payment 

(other than any down payment). Two 

commenters also recommended 

clarifying that the assignment can 

involve more than one party, such as if 

a fintech indirect lending partner uses 

one or more agents or subsidiaries to 

facilitate its operations prior to the loan 

being delivered to the credit union. One 

of those commenters suggested the 

changes discussed in this paragraph 

could be made to the rule by adding a 

new paragraph to proposed 

§ 701.21(c)(9)(i) that would provide as 

follows: 

The requirement that the loan be assigned 

to the purchaser very soon after the inception 

of the obligation to extend credit may be 

satisfied regardless of whether the 

assignment process undergoes multiple 

functional steps, with multiple entities, and 

including where the assignment is processed 

as part of a batch of loans, on a cyclical 

cadence or otherwise, so long as assignment 

occurs before the first loan payment 

following any down payment. 

Finally, one commenter suggested 

that if ‘‘very soon after’’ is defined, the 

definition should ensure that 

appropriate flexibility is given to 

address the various timeframes required 

to appropriately assign loans backed by 

different collateral types and to ensure 

a more forward-looking regulation that 

can help ensure future evolution as loan 

and lease products continue to change. 

Discussion 

The Board appreciates the detailed 

comments that were submitted 

regarding defining the phrase ‘‘very 

soon after.’’ Defining the phrase in this 

final rule, however, would go beyond 

the scope of the proposal. Accordingly, 

the comments received on this issue 

have been shared with the Board, 

reviewed, and will be retained for 

consideration by the NCUA in future 

rulemakings relating to indirect lending. 

Several commenters expressed 

confusion regarding the NCUA’s use of 

the term ‘‘very soon after’’ in the 

regulation. The term very soon after has 

been used but not defined in the 

NCUA’s indirect lending regulation 

since 1998.21 The period that satisfies 

the ‘‘very soon after’’ 22 element 

depends on the nature of the loan and 

the practical realities of assigning 

certain kinds of loans in the current 

marketplace and in accordance with 

prevailing industry standards.23 ‘‘Very 

soon after’’ is determined on a case-bycase basis by loan type and in 

accordance with commercial 

reasonableness.24 The NCUA’s 

longstanding position is that the sooner 

the assignment is made the more likely 

the point-of-sale retailer will be viewed 

as an indirect lender and not the 

originating lender.25 Historically, NCUA 

examination staff have generally used 7 

days as a baseline for gauging whether 

a transaction meets the ‘‘very soon 

after’’ timeframe, but this has not been 

codified as a requirement. The longer 

the time between formation of the 

contract and assignment, the more likely 

the arrangement will be viewed as the 

purchase of a third-party loan rather 

than the making of a loan through 

indirect channels.26 The NCUA also 


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27 (emphasis added); see also, e.g., NCUA Legal 

Op. 97–0546 (Aug. 6, 1997) (providing in relevant 

part as follows: ‘‘FCUs may participate in indirect 

lending arrangements under the authority to make 

loans to members, 12 U.S.C. 107(5); 12 CFR701.21, 

rather than the authority to purchase eligible 

obligations, 12 U.S.C. 107(13); 12 CFR 701.23, as 

long as two conditions are met. First, the FCU must 

make the final underwriting decision. That is, 

before the retailer and the member complete the 

loan or sales contract, the FCU must review the 

application and determine that the transaction 

conforms to its lending policies. This is because an 

FCU may not delegate its lending authority to a 

third party. Second, the retailer must assign the 

loan or sales contract to the FCU very soon after it 

is completed. Assignment close in time to the 

making of the loan allows the retailer to function 

as the facilitator of the loan while the FCU remains 

the true lender. As the time between completion 

and assignment of the loan lengthens, the FCU’s 

payment to the retailer becomes the purchase of the 

loan rather than part of the processing of the 

loan.’’). 

28 (emphasis added). 

29Section 714.2(b) (Providing: ‘‘[An FCU] may 

engage in indirect leasing. In indirect leasing, a 

third party leases property to [the FCU’s] member 

and [the FCU] then purchases that lease from the 

third party for the purpose of leasing the property 

to [the FCU’s] member. [The FCU does] not have to 

purchase the leased property if [it complies] with 

the requirements of § 714.3.’’). 

notes that the technology used in many 

indirect lending relationships today 

allows for an almost instantaneous 

assignment of loans. 

In addition, two commenters 

recommended defining ‘‘very soon 

after’’ in a way that clarifies that the 

requirement for a loan to be assigned to 

the purchaser very soon after the 

inception of the obligation to extend 

credit may be satisfied regardless of 

whether the assignment process 

undergoes multiple functional steps, 

with multiple entities, so long as the 

other requirements of 701.21(c)(9) are 

met and those steps occur before the 

loan is assigned. The Board appreciates 

this recommendation, but believes this 

clarification is unnecessary because the 

plain language of both current 

§ 701.23(b)(4)(iv) and § 701.21(c)(9)(i) of 

the final rule are clear. Neither 

paragraph imposes a limitation on the 

number of functional steps or entities 

that are involved in the assignment 

process, provided the loan is assigned 

very soon after the inception of the 

obligation to extend credit and all other 

applicable requirements are met. 

Should the Board propose a separate 

indirect lending rule? The Board asked 

in the proposal whether the NCUA 

should establish an indirect lending 

rule. And if so, the Board asked what it 

should consider in any future indirect 

lending rulemaking. The Board also 

asked if a credit union should be 

considered the originating lender in 

cases where an intermediary is added to 

a loan transaction between the initial 

party extending credit and a credit 

union, including a third party 

facilitating the loan transaction. The 

NCUA received several inquiries from 

the credit union system related to 

CUSOs that work with other lenders to 

extend credit. The CUSOs in those cases 

then either receive an immediate 

assignment of the loans and/or act as a 

facilitator in immediately assigning 

loans further to credit unions, where the 

loans meet the credit unions’ 

underwriting criteria. 

Public Comments 

Two commenters responded in the 

negative to the NCUA’s question about 

whether the agency should establish a 

separate indirect lending rule. One of 

those commenters recommended 

maintaining a principles-based 

approach in this area and suggested 

such an approach requires no separate 

rule. The other commenter suggested 

there are numerous situations where a 

credit union would use a third party to 

assist in the origination of loans and a 

separate indirect lending rule would not 

change the overall impact of being 

considered the originating lender. One 

commenter recommended not 

undertaking a separate indirect lending 

rulemaking until the agency is able to 

evaluate and understand how credit 

unions and other credit union industry 

stakeholders react to any final rule the 

NCUA adopts related to this proposal. 

Finally, three commenters 

recommended a separate indirect 

lending rulemaking to provide greater 

clarity and encourage greater 

participation in this area. One of those 

commenters suggested further that a 

new indirect lending rulemaking could 

amplify participation and provide credit 

unions, financial service providers, and 

CUSOs greater opportunity to 

collaborate and impact member 

retention and growth. 

Discussion 

The Board appreciates the detailed 

comments that were submitted 

regarding proposing a separate indirect 

lending rule. While the comments 

received in this area go beyond the 

scope of this rulemaking, the comments 

will be retained for consideration by the 

NCUA during future rulemakings 

relating to indirect lending. 

New § 701.21(c)(9)(ii) Indirect Lending 

New § 701.21(c)(9)(ii), consistent with 

current § 701.23(b)(4)(iv), clarifies the 

difference between loans made pursuant 

to indirect lending arrangements under 

§ 701.21 and loans purchased under 

§ 701.23. Current § 701.23(b)(4)(iv) 

excludes loans acquired pursuant to 

certain indirect lending arrangements 

from the 5-percent limit under current 

paragraph (b)(4). Paragraph (b)(4)(iv) 

provides that an indirect lending or 

indirect leasing arrangement that is 

classified as a loan and not the 

purchase of an eligible obligation 

because the FCU makes the final 

underwriting decision, and the sales or 

lease contract is assigned to the FCU 

very soon after it is signed by the 

member and the dealer or leasing 

company, is excluded from calculating 

the 5-percent limit.27 As previously 

mentioned, current § 701.23(b)(4)(iv) is 

removed by this final rule. Accordingly, 

new § 701.21(c)(9)(ii) provides that a 

loan acquired pursuant to an indirect 

lending arrangement, and that meets the 

requirements of § 701.21, is classified as 

a loan and not the purchase of a loan for 

purposes of the NCUA’s regulations, 

which are codified in chapter VII of title 

12 of the Code of Federal Regulations. 

Public Comments 

One commenter suggested clarifying 

in proposed § 701.21(c)(9)(ii) that for a 

loan to be classified as an ‘‘indirect 

loan,’’ it must meet the requirements of 

§ 701.21 and the FCU Act.28

Discussion 

The Board believes the clarification 

requested above is unnecessary. The 

requirement that FICUs also comply 

with the Act is already clear under the 

NCUA’s regulations given the authority 

for most of the provisions in the 

NCUA’s regulations are derived directly 

from the Act itself. Moreover, adding 

such a statement in one provision 

within the NCUA’s regulations, but not 

everywhere, could give the false 

impression that FICUs do not have to 

comply with the Act’s requirements in 

places where the NCUA’s regulations do 

not specifically require it. Accordingly, 

the final rule adopts the language 

proposed without change for the reasons 

set forth in the notice of proposed 

rulemaking. 

New § 701.21(c)(9)(iii) Indirect Leasing 

New § 701.21(c)(9)(iii), consistent 

with current §§ 701.23(b)(4)(iv) and 

714.9, clarifies the difference between 

leases made pursuant to indirect leasing 

arrangements under § 714.2(b) 29 and 

leases purchased under § 701.23. 

Current § 701.23(b)(4)(iv) excludes 

leases acquired pursuant to certain 

indirect leasing arrangements from the 

5-percent limit under current paragraph 

(b)(4). Paragraph (b)(4)(iv) provides that 

an indirect lending or indirect leasing 

arrangement that is classified as a loan 

and not the purchase of an eligible 

obligation because the FCU makes the 


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30 Id. (emphasis added); see also 12 CFR 714.2(b) 

& 714.9; and NCUA Legal Op. 00–0811 (Nov. 2000) 

(providing in part as follows: ‘‘NCUA’s leasing 

regulation recognizes that FCUs may engage in the 

leasing of personal property and does not 

distinguish between consumer and business 

leasing. 12 CFR part 714. The authority of FCUs to 

engage in secured lending is the basis for their 

authority to engage in leasing. Therefore, FCU 

leasing generally must comply with the statutory 

and regulatory requirements applicable to secured 

lending, including the member business loan rule. 

12 CFR part 723. Our leasing regulation, however, 

notes exceptions from certain provisions of the 

lending rules that are not pertinent to leasing; for 

example, the interest rate ceilings. 12 CFR 714.10, 

701.21(c)(7). In a lease, the lessee’s payments are 

periodic rental payments, not the repayment of 

principal and interest as in a loan.’’). 

31Note, § 741.8 requires prior approval for the 

purchase of certain types of loans and partial loans 

authorized under § 701.23(b). 

32 78 FR 37946 (June 25, 2013). 

33 Id. at 37948. 

final underwriting decision, and the 

sales or lease contract is assigned to the 

FCU very soon after it is signed by the 

member and the dealer or leasing 

company, is excluded in calculating the 

5-percent limitation.30 Similarly, 

current § 714.9 provides that an FCU’s 

indirect leasing arrangements are not 

subject to the eligible obligation limit if 

they satisfy the provisions of 

§ 701.23(b)(3)(iv) that require that an 

FCU make the final underwriting 

decision and that the lease contract is 

assigned to the FCU very soon after it 

is signed by the member and the dealer 

or leasing company. Accordingly, new 

§ 701.21(c)(9)(iii) provides that a lease 

acquired pursuant to an indirect leasing 

arrangement, and that meets the 

requirements of part 714 of the NCUA’s 

regulations, is classified as a lease and 

not the purchase of a lease for purposes 

of the NCUA’s regulations, which are 

codified in chapter VII of title 12 of the 

Code of Federal Regulations. 

Section 701.22 Loan Participations 

As discussed in more detail below, 

the final rule makes clarifying 

amendments to § 701.22. These changes 

are primarily intended to clarify FCUs’ 

authority to purchase loan 

participations and the requirements 

applicable to the purchase of loan 

participations by federally insured, 

state-chartered credit unions (FISCUs). 

Public Comments 

Two commenters asked the NCUA to 

do more to reduce confusion regarding 

whether §§ 701.22 or 701.23 applies to 

a particular transaction. One of those 

commenters recommended that the 

NCUA clarify in the loan participation 

and eligible obligation rules that 

purchasing FICUs have discretion to 

classify a partial interest in a loan under 

either Section 701.22 or 701.23 when 

the terms and conditions of the 

purchase meet the requirements of both 

rules. 

Discussion 

The specific clarifications requested 

above would expand the authorities 

proposed beyond the scope of the 

proposed rule. As outlined in the notice 

of proposed rulemaking, one purpose of 

the amendments was to clarify 

ambiguities related to distinguishing 

between loan participations and eligible 

obligations. To facilitate this, the 

proposed definition of eligible 

obligation was revised to provide that 

an eligible obligation is a whole loan or 

part of a loan (other than a note held by 

a liquidating credit union) that does not 

meet the definition of a loan 

participation under § 701.22(a). The 

Board believes the rule clarifies FICUs’ 

authority to purchase partial loans 

under § 701.23 given that the amended 

definition of ‘‘eligible obligation’’ 

expressly excludes the purchase of 

partial loans that meet the definition of 

a ‘‘loan participation,’’ as that term is 

defined under § 701.22(a). An FCU is 

authorized under §§ 701.22 and 701.23 

to purchase a loan or part of a loan only 

if it meets the definition of one of the 

following: (1) a ‘‘loan participation,’’ (2) 

an ‘‘eligible obligation,’’ or (3) a ‘‘note 

of a liquidating credit union.’’ 31 For 

FCUs, a loan or partial loan purchased 

cannot meet the definitions of both an 

eligible obligation and a loan 

participation. Amending the final rule 

to provide otherwise would go beyond 

the scope of this rulemaking. For 

FISCUs, partial loan purchases that 

meet the definition of a ‘‘loan 

participation’’ must comply with the 

requirements of § 741.225 and the 

applicable requirements of § 701.22. 

Other types of loans purchased by 

FISCUs must meet the requirements of 

both state law and part 741 of the 

NCUA’s regulations. Accordingly, the 

Board adopts the language originally 

proposed in § 701.22 without change for 

the reasons set forth in the notice of 

proposed rulemaking. 

The purchase of part of a loan under 

§ 701.23 and the purchase of a loan 

participation under § 701.22 are treated 

as separate and distinct transactions 

under the final rule. The purchase of 

part of a loan by an FCU, provided it 

meets the definition of an eligible 

obligation, is subject to the requirements 

and conditions of § 701.23. The 

purchase of a loan participation, as 

defined under § 701.22, by a FICU is 

subject to the requirements and 

conditions under the NCUA’s loan 

participation rule. Credit unions must 

properly identify each transaction as 

either the purchase of an eligible 

obligation or the purchase of a loan 

participation at the time of purchase. 

701.22 Introductory Paragraph 

The introductory paragraph to current 

§ 701.22 sets forth the scope and 

limitations of the section. The NCUA 

Board added the introductory paragraph 

to § 701.22 as part of a final rule it 

approved in 2013 (2013 Final Rule).32

The introductory paragraph was 

intended to clarify several issues related 

to the scope and applicability of 

§ 701.22. In particular, the 2013 Final 

Rule is explained as follows in the 

remainder of this paragraph. The 

introductory text clarified the scope of 

the rule and helped distinguish a loan 

participation under § 701.22 from an 

eligible obligation under § 701.23. 

Further, it clarified that the rule applies 

to a consumer FICU’s purchase of a loan 

participation where the borrower is not 

a member of that credit union. The 

introductory text goes on to state that 

generally, an FCU’s purchase, in whole 

or in part, of its member’s loan is 

covered by NCUA’s eligible obligations 

rule at § 701.23. Additionally, by a 

cross-reference to Part 741 of NCUA’s 

regulations, the rule also was made 

applicable to consumer FISCUs. The 

Board noted that corporate credit unions 

are subject to the loan participation 

requirements set forth in Part 704 and, 

therefore, are not subject to § 701.22 of 

NCUA’s regulations.33

The introductory paragraph to current 

§ 701.22 has seven separate substantive 

provisions. First, the paragraph provides 

that this section applies only to loan 

participations as defined in the section. 

Second, it provides that the section does 

not apply to the purchase of an 

investment interest in a pool of loans. 

Third, it provides that the section 

establishes the requirements a FICU 

must satisfy to purchase a loan 

participation. Fourth, it provides that 

the section applies to a FICU’s purchase 

of a loan participation only where the 

borrower is not a member of the 

purchasing FICU and where a 

continuing contractual obligation 

between the seller and purchaser is 

contemplated. Fifth, it provides that 

§ 701.23 generally applies to an FCU’s 

purchase of all or part of a loan made 

to one of its members. Sixth, it provides 

that § 741.225 requires FISCUs to 

comply with the requirements of 

§ 701.22. Section 741.225 also provides 

that FISCUs are exempt from the 

borrower membership requirement in 

current § 701.22(b)(4). Seventh, the 


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34Emphasis added. 

35Emphasis added. 36Emphasis added. 

37Emphasis added. 

38See, e.g., NCUA Legal Op. 18–0133 (March 

2018), available at https://www.ncua.gov/ 

regulation-supervision/legal-opinions/2018/loanparticipations. 

paragraph provides that the section does 

not apply to corporate credit unions as 

defined in part 704. 

In the 2013 Final Rule, the Board 

added a similar introductory paragraph 

to § 701.23 regarding the purchase, sale, 

and pledge of eligible obligations to 

clarify the scope of that section and 

distinguish loan participations from 

eligible obligations. The provisions 

included in that introductory paragraph 

are discussed in detail later in the part 

of the preamble about the introductory 

paragraph to § 701.23. 

Since adopting the prefatory language 

in both sections, the NCUA has received 

inquiries from NCUA examiners, FICUs, 

fintech companies, and other parties 

who have expressed confusion about 

how to interpret many of these 

provisions. This confusion has led to 

inconsistent reporting of loan interests 

by FICUs and uncertainty about which 

of the two sections, § 701.22 or § 701.23, 

to apply to certain transactions, 

particularly innovative programs that 

have been designed by FICUs after 2013. 

In addition, the Board is concerned that 

continued confusion about lines of 

authority in this area could discourage 

FICUs from entering into certain safe, 

sound, and compliant loan 

participation, purchase, or sale 

agreements that are within their 

statutory authority. 

One significant issue with the 

introductory paragraph to current 

§ 701.22 that parties have raised is when 

a FICU’s partial loan purchase is subject 

to that section. Parties have cited the 

continuing contractual obligation 

qualifier as a source of confusion. The 

fourth sentence in the introductory 

paragraph provides that the section 

applies only to a FICU’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.34 The fifth 

sentence in the paragraph provides 

further that, generally, an FCU’s 

purchase of all or part of a loan made 

to one of its own members, subject to a 

limited exception for certain wellcapitalized FCUs in § 701.23(b)(2), 

where no continuing contractual 

obligation between the seller and 

purchaser is contemplated, is governed 

by § 701.23 of this part.35 Similarly, the 

introductory paragraph to § 701.23 

provides that § 701.23 governs an FCU’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 FCUs, where no 

continuing contractual obligation 

between the seller and purchaser is 

contemplated.36

In practice, however, purchase 

agreements, regardless of whether the 

transactions involve the purchase of an 

eligible obligation or a loan 

participation, frequently contain some 

form of continuing contractual 

obligation between the buyer and the 

seller, including representations and 

warranties regarding the loans and loan 

repurchase agreements, servicing 

agreements, and other similar types of 

ongoing obligations set forth under the 

agreements. The Board believes the 

continuing contractual obligation 

clauses in the fourth and fifth sentences 

in the introductory paragraphs to 

current § 701.22 are unnecessary when 

determining whether a loan purchase 

agreement qualifies as either a loan 

participation or an eligible obligation. 

In addition to the concerns explained 

above, the clause where the borrower is 

not a member of that credit union in the 

first part of the fourth sentence of the 

introductory paragraph conflicts with 

another provision in § 701.22. This 

language could be misinterpreted to 

suggest that § 701.22 does not apply to 

a partial loan purchase where the 

borrower is a member of the purchasing 

credit union, even when the transaction 

otherwise meets the definition of a loan 

participation under § 701.22. This 

clause directly conflicts with the more 

specific requirement in § 701.22(b)(4), 

which provides that the borrower must 

become a member of one of the 

participating credit unions before the 

purchasing FICU purchases a 

participation interest in the loan. The 

NCUA has long interpreted the more 

specific language in paragraph (b)(4) as 

controlling and has applied the 

requirements of § 701.22 to partial loan 

purchases where the purchase meets the 

definition of a loan participation and 

the borrower is a member of the 

purchasing FICU. 

Accordingly, the NCUA believes the 

removal of this clause will serve to 

clarify and reduce confusion when 

§ 701.22 applies to certain transactions. 

As part of the 2022 proposed rule, the 

Board requested comment on whether 

deleting the fourth and fifth sentences 

in the introductory paragraph to current 

§ 701.22 would clarify when the section 

applies to certain transactions. 

The NCUA recognizes that whether 

the purchase of a partial loan is a loan 

participation under § 701.22 or a loan 

purchase under § 701.23 may still be 

uncertain in some instances even if 

these sentences are removed. The NCUA 

believes, however, that other provisions 

in § 701.22, such as the definition of 

loan participation and the conditions 

outlined in paragraph (b), make clear 

which transactions are subject to the 

requirements of § 701.22. 

As discussed in more detail in the 

part of the preamble below regarding 

§ 701.23, the Board is also deleting the 

continuing contractual obligations 

sentence in current § 701.23. The Board 

intends the deletion to work in 

conjunction with the changes to the 

introductory paragraph to current 

§ 701.22. 

The Board proposed no other changes 

to the introductory paragraph to current 

§ 701.22. Another provision in the 

introductory paragraph that is often 

misread, however, is the sentence 

providing that § 701.22 does not apply 

to the purchase of an investment 

interest in a pool of loans. That sentence 

is intended to clarify that the purchase 

of such investment interests, to the 

extent they are permitted, are governed 

by part 703 of the NCUA’s regulations 

for FCUs (and under part 741 of the 

NCUA’s regulations and as authorized 

under state law for FISCUs) and not 

§ 701.22. This continues to be the case 

under this proposal. The NCUA notes 

further that this qualification to the 

section makes clear that § 701.22 neither 

applies to nor authorizes FICU 

investments in either asset-backed 

securities or the purchase of other 

similar investment interests in pools of 

loans.37 The requirements of § 701.22 

apply to each individual loan in which 

a FICU purchases a loan participation 

interest.38

The final rule amends the 

introductory text of § 701.22 to provide 

the following: First, § 701.22 applies 

only to loan participations as defined in 

paragraph (a). Second, § 701.22 does not 

apply to the purchase of an investment 

interest in a pool of loans. Third, 

§ 701.22 establishes the requirements a 

FICU must satisfy to purchase a 

participation in a loan. Fourth, FISCUs 

are required by § 741.225 to comply 

with the loan participation requirements 

of the section. Fifth, § 701.22 does not 

apply to corporate credit unions, as that 

term is defined in § 704.2. 

Public Comments 

Four commenters stated generally that 

they supported the proposed changes to 

the introductory paragraph because the 

changes will reduce confusion and 

better enable credit unions to evaluate 


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39NCUA Legal Op. 15–0813 (Aug. 10, 2015) 

available at https://www.ncua.gov/regulationsupervision/legal-opinions/2015/loanparticipations-indirect-loans-originating-lenders. 

40 78 FR 37946, 37949 (June 25, 2013) (providing 

verbatim that, ‘‘[t]he proposed rule revised the 

definitions of ‘originating lender’ and ‘loan 

participation’ to clarify that the originating lender 

must participate in the loan throughout the life of 

the loan.’’); see also § 701.22(a) (providing in 

relevant part that, loan participation means a loan 

where one or more eligible organizations participate 

pursuant to a written agreement with the originating 

lender, and the written agreement requires the 

originating lender’s continuing participation 

throughout the life of the loan. (emphasis added)). 

41 § 1757(5) and (5)(E). 

42See 76 FR 79548, 79549 (Dec. 22, 2011); and 

78 FR 37946, 37949 (June 25, 2013) (providing that 

the requirement that credit unions only participate 

with the originating lender derives from the FCU 

Act’s requirement for originating FCUs to retain at 

least a 10 percent interest in the face amount of all 

loans they participate out. Moreover, the Board 

interprets the authority in the FCU Act for credit 

unions to participate in loans ‘‘with’’ other lenders 

to contemplate a shared, continuing lending 

arrangement. Simply put, the rule requires an 

originating lender to remain part of the 

participation arrangement and to retain a 

continuing interest in the loan in order to be a true 

participant. Otherwise, the transaction is not a loan 

participation but more akin to the sale of an eligible 

obligation.). 

43 12 U.S.C. 1757(5) (emphasis added). 

44Section 1757(5)(E) (emphasis added). 

45See 76 FR 79548, 79548 (Dec. 22, 2011) 

(Explaining in part that loan participations [. . .] 

create more systemic risk to the share insurance 

fund (NCUSIF) due to the resulting interconnection 

between participants. For example, large volumes of 

participated loans in the system tied to a single 

originator, borrower, or industry or serviced by a 

single entity have the potential to impact multiple 

credit unions if a problem arises. Additionally, as 

both federal credit unions (FCUs) and federally 

insured, state-chartered credit unions (FISCUs) 

actively engage in loan participations, it is 

important to the safety and soundness of the 

NCUSIF that all federally insured credit unions 

(FICUs) adhere to the same minimum standards for 

engaging in loan participations. The Board believes 

such standards are necessary to ensure the NCUSIF 

consistently recognizes and accounts for the risks 

associated with the purchase of loan participations. 

Finally, during examinations and other FICU 

contacts, the agency has encountered confusion 

concerning the application of the current loan 

participation rule regarding the entities and 

transactions subject to the rule.); and 78 FR 37946, 

37947 & 37955 (June 25, 2013); and § 741.225. 

new loan participation opportunities 

without reducing credit unions’ loan 

participation authorities or increasing 

risks to individual credit unions or the 

Share Insurance Fund. Four 

commenters stated that they supported 

deleting the ‘‘continuing contractual 

obligation’’ clauses in the introductory 

paragraph. In addition, one commenter 

recommended removing the sentence in 

the introductory paragraph regarding 

the restriction of corporate credit unions 

purchasing loan participations from 

eligible organizations. The commenter 

explained that this issue is covered in 

section 704 appendix B, which requires 

part IV authority be granted by the 

NCUA for corporates to purchase 

participations. The commenter 

recommended further that corporate 

credit unions be allowed to purchase 

loan participations from FICUs by 

removing this sentence and eliminating 

the Part IV authority requiring separate 

application and approval for any 

purchase authority. The commenter 

suggested that corporate credit unions 

act as a liquidity provider for credit 

unions and being allowed to purchase 

loan participations with fewer 

restrictions would provide much 

needed liquidity and improve the 

overall safety and soundness for the 

credit union system. 

Discussion 

Commenters generally supported the 

proposed changes to the introductory 

paragraph to § 701.22, with one 

commenter suggesting additional 

changes that go beyond the scope of the 

proposed rule. While the Board 

appreciates that comment, the NCUA 

did not propose allowing corporate 

credit unions to purchase loan 

participations from FICUs by removing 

the last sentence of the current 

introductory paragraph and eliminating 

the Part IV authority requiring separate 

application and approval for any 

purchase authority. The NCUA will 

retain the comment, however, for 

consideration as part of future 

rulemakings related to loan 

participations or corporate credit union 

purchase authorities. Given the NCUA 

received no comments in opposition to 

the proposed changes, the Board is 

adopting the changes in this final rule 

as proposed for the reasons set forth in 

the notice of proposed rulemaking. 

Defining the term ‘‘investment interest 

in a pool of loans’’? The Board asked in 

the proposal whether it should define 

the term ‘‘an investment in a pool of 

loans’’ in a future rulemaking. And, if 

so, the Board asked how the term 

should be defined and why. 

Public Comments 

Three commenters responded in the 

affirmative to the NCUA’s question. One 

commenter recommended clarifying 

that the restrictions in § 701.22 

(containing the memberization 

requirement for FCUs) do not apply to 

an investment in a pool of loans. 

Another commenter suggested the 

phrase is confusing as currently used 

and does not provide information 

regarding what options credit unions 

may have to invest in these types of 

transactions. The commenter asked, as 

an example, would this include the 

ability to invest in a ‘‘pool’’ or ‘‘fund’’ 

of subordinated debt loans made to 

credit unions? In the commenter’s 

opinion, credit unions should be 

allowed to purchase a percentage of a 

pool of loans that credit unions are 

allowed to originate. 

Discussion 

The Board appreciates the comments 

received and will retain them for 

consideration as part of future 

rulemaking efforts related to this area of 

the NCUA’s regulations. 

Section 701.22(a) 

The final rule adds a second sentence 

to the current definition of ‘‘originating 

lender’’ in § 701.22(a) to codify and 

further clarify a 2015 NCUA legal 

opinion (2015 Opinion) regarding loan 

participations in indirect loans.39 The 

NCUA’s 2013 Final Rule amended the 

loan participation regulation to, among 

other things, clarify that the originating 

lender must participate in the loan 

throughout the life of the loan.40 In the 

2013 Final Rule, the NCUA explained 

that this requirement derives from 

sections 107(5) and (5)(E) 41 of the Act.42

Section 107(5) provides in relevant part 

that an FCU shall have the power to 

participate with other credit unions, 

credit union organizations, or financial 

organizations in making loans to credit 

union members.43 Section 107(5)(E) 

requires further that participation loans 

with other credit unions, credit union 

organizations, or financial organizations 

shall be in accordance with written 

policies of the FCU’s board of directors, 

provided that an FCU that originates a 

loan for which participation 

arrangements are made in accordance 

with this subsection shall retain an 

interest of at least 10 per centum of the 

face amount of the loan.44 While the 

statutory requirements of section 

107(5)(E) primarily pertain to FCUs 

involved in loan participations, the 

Board chose, for safety and soundness 

reasons, to extend most of the 

requirements in § 701.22 to cover all 

FICUs as part of the 2013 Final Rule.45

In the 2013 Final Rule, the Board 

noted two specific safety and soundness 

concerns as reasons for adopting the 

current definition of ‘‘originating 

lender,’’ explaining in relevant part as 

follows: 

The 2013 Final Rule requires an originating 

lender to remain part of the participation 

arrangement and to retain a continuing 

interest in the loan in order to be a true 

participant. Otherwise, the transaction is not 

a loan participation but more akin to the sale 

of an eligible obligation. As the Board noted 

in 1991, permitting the sale of participation 

interests in eligible obligations will blur the 

distinction between loan participations and 

loan purchases and sales, arguably 


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46 78 FR 37946, 37948 & 37949 (emphasis added) 

(providing also that in granting [loan participation 

authority to FCUs], Congress expressed its intent to 

enhance the ability of FCUs to serve their members’ 

loan demands. Congress also expressed, however, 

that originating FCUs must maintain discipline in 

the origination process. [. . . T]he loan 

participation authority must not be so broad that 

loan participations may be originated from any 

source. [. . .]); 56 FR 15034, 15034–15035 (April 

15, 1991) (providing that NCUA has interpreted the 

term ‘‘participation loan’’ to mean arrangements 

made prior to disbursements of the loan proceeds. 

In the preamble to the proposed rule, the Board 

stated that this interpretation may be too restrictive 

and proposed deleting it. [. . .] One commenter 

noted that this change will blur the distinction 

between loan participations and loan purchases and 

sales. [. . .] There are two basic safety and 

soundness concerns with the proposed change. 

FCUs may have a decreased interest in properly 

underwriting a loan if they know they can later 

reduce their risk by selling participation interests in 

it. Alternatively, FCUs interested in obtaining a 

participation after the loan is made may not 

properly investigate the loan and may instead rely 

on the original participants to have properly 

underwritten the loan. FCUs may jump in without 

a proper due diligence review. [. . .] Accordingly, 

the NCUA Board declines to adopt the proposed 

change and will continue to require a written 

commitment to participate in a loan precede final 

disbursement.); see also 68 FR 39866, 39867 (July 

3, 2003); 68 FR 75110 (Dec. 30, 2003); and H.R. Rep. 

No. 95–23, at 12 (1977), reprinted in 1977 

U.S.C.C.A.N. 115. 

47 78 FR 37949–37950 (emphasis added). 

48See, e.g., NCUA Legal Op. 92–1203 (Jan. 5, 

1993); NCUA Legal Op. 92–1203 (May 11, 1993); 

NCUA Legal Op. 97–0546 (Aug. 6, 1997), available 

at https://ncua.gov/regulation-supervision/legalopinions; and § 701.23(b)(4)(iv). 

49NCUA Legal Op. 97–0546 (emphasis added). 

50 § 701.22(d)(4)(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.’’). 

51 § 1757(5). 

52 § 1757(13). 

53NCUA Legal Op. 97–0546. 

54 Id. (providing in relevant part as follows: 

‘‘Eligible organization means a credit union, credit 

union organization, or financial organization.’’). 

55See § 701.23(b)(4)(iv) (‘‘An indirect lending or 

indirect leasing arrangement that is classified as a 

loan and not the purchase of an eligible obligation 

circumventing the purpose of the loan 

participation and eligible obligations rules. 

Additionally, the Board believes the 

continued participation of the lender that 

initially originated the loan is integral to a 

safe and sound participation arrangement. In 

1991, the Board expressed its concern that a 

lender may have a decreased interest in 

properly underwriting a loan if they know 

they can later reduce their risk by selling 

participation interests in it. The requirement 

for the originating lender’s continued 

participation in a loan participation 

arrangement is intended to address this 

safety and soundness concern.46

As explained in more detail below, 

these concerns are fully accounted for 

under the 2015 Opinion and this 

rulemaking by limiting the 

interpretation to indirect loans and 

requiring that such loans meet the same 

general requirements applicable to 

indirect loans made by FCUs under 

current § 701.23(b)(4)(iv). 

The 2013 Final Rule responded to 

concerns raised by commenters 

regarding the proposed definition of 

‘‘originating lender’’ and its application 

in situations where a CUSO underwrites 

and processes a loan, but the FICU 

funds the loan. In response to this 

feedback the Board provided the 

following explanation: 

These commenters observed that a CUSO 

often serves as an originator in name only 

and, thus, is not the most appropriate party 

to regard as the originating lender for the 

purposes of the rule. For example, loans may 

be underwritten and processed by a CUSO, 

but funded by its owner credit union. The 

Board acknowledged that this CUSO model 

is not uncommon within the industry and 

permissible under § 712.5. For purposes of 

this final rule, it was the Board’s intent that 

the originating lender is the entity with 

which the borrower initially or originally 

contracts for the loan.47

As noted, the Board’s responses to 

commenters in the 2013 Final Rule 

regarding the definition of originating 

lender were limited to situations in 

which a FICU purchased a loan from a 

CUSO that had underwritten the loan. 

The Board did not discuss the 

application of the definition of 

originating lender to CUSOs or other 

entities in the context of indirect 

lending arrangements in which a 

purchasing FICU underwrites the loan 

and makes the final underwriting 

decision. Accordingly, the application 

of the definition of originating lender to 

CUSOs or other entities in the context 

of indirect lending arrangements was 

left unaddressed in the 2013 Final Rule 

and open to later interpretation by the 

NCUA, which is what it did 2 years later 

in the 2015 Opinion discussed in more 

detail in the following paragraphs. 

The NCUA has long used the act of 

underwriting a loan as a feature to 

distinguish between transactions where 

a FICU makes a loan and transactions 

where a FICU purchases a loan.48 In 

particular, in a 1997 legal opinion the 

NCUA explained as follows: 

FCUs may participate in indirect lending 

arrangements under the authority to make 

loans to members, 12 U.S.C. 107(5); 12 CFR 

701.21, rather than the authority to purchase 

eligible obligations, 12 U.S.C. 107(13); 12 

CFR 701.23, as long as two conditions are 

met. First, the FCU must make the final 

underwriting decision. That is, before the 

retailer and the member complete the loan or 

sales contract, the FCU must review the 

application and determine that the 

transaction conforms to its lending policies. 

This is because an FCU may not delegate its 

lending authority to a third party. Second, 

the retailer must assign the loan or sales 

contract to the FCU very soon after it is 

completed. Assignment close in time to the 

making of the loan allows the retailer to 

function as the facilitator of the loan while 

the FCU remains the true lender. As the time 

between completion and assignment of the 

loan lengthens, the FCU’s payment to the 

retailer becomes the purchase of the loan 

rather than part of the processing of the 

loan.49

By requiring the purchasing credit 

union to make the final underwriting 

decision in an indirect lending 

transaction, the NCUA ensured that the 

purchasing credit union was not relying 

on the due diligence of the loan seller 

who might otherwise have had a 

decreased interest in properly 

underwriting the loan knowing that it 

would later be sold. Moreover, under 

the NCUA’s loan participation 

regulation, the originating lender is 

required to retain at least a 5-percent 

interest in any participation for the life 

of the loan.50 Accordingly, where an 

eligible organization makes a loan 

through an indirect lending arrangement 

there is no greater risk of incentives for 

lax or improper underwriting for 

purposes of § 701.22 than if the eligible 

organization had processed and funded 

the loan itself. 

Furthermore, as discussed in the 1997 

legal opinion quoted above, the NCUA 

has long distinguished between indirect 

loans, made under section 107(5) 51 of 

the FCU Act and § 701.21 of the NCUA’s 

regulations, and eligible obligations 

purchased under section 107(13) 52 of 

the FCU Act and § 701.23 of the NCUA’s 

regulations.53 For over 25 years the 

NCUA has treated indirect loans—as 

defined under current 

§ 701.23(b)(4)(iv)—made by a credit 

union to be separate and distinct from 

eligible obligations. Accordingly, while 

permitting the sale of participation 

interests in eligible obligations might 

blur the distinction between loan 

participations and loan purchases and 

sales and circumvent the purpose of the 

loan participation and eligible 

obligation rules, allowing the sale of 

participation interests in indirect loans 

presents no such risk. 

Working within the regulatory and 

interpretative history discussed above, 

the NCUA determined in the 2015 

Opinion that an ‘‘eligible 

organization’’ 54 may be considered the 

‘‘originating lender’’ for purposes of 

§ 701.22 where the eligible organization 

generated the loan through an ‘‘indirect 

lending arrangement’’ 55 with a retailer 


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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.’’) (emphasis added). 

56NCUA Legal Op. 15–0813. 

57 Id. (providing in relevant part, ‘‘[o]riginating 

lender means the participant with which the 

borrower initially or originally contracts for a loan 

and who, thereafter or concurrently with the 

funding of the loan, sells participations to other 

lenders.’’). 

58See § 701.22(b)(4)(iv); see also NCUA Legal Op. 

15–0813; and 78 FR 37946, 37949 (explaining that 

‘‘a lender ‘may have a decreased interest in properly 

underwriting a loan if they know they can later 

reduce their risk by selling participation interests in 

it.’ ’’). 

59See id. 60See NCUA Legal Op. 97–0546. 61See id. 62See id. 63Emphasis added. 64See NCUA Legal Op. 97–0546. 65The preamble to the 1998 proposal to amend 

the eligible obligations rule requested public 

comment on whether the NCUA should specify a 

certain number of days as constituting ‘‘very soon.’’ 

63 FR 41976, 41977 (Aug. 6, 1998). After 

considering the comments, however, the NCUA 

Board determined not to specifically define it 

because it wanted to provide FCUs with flexibility 

under various circumstances. The NCUA Board also 

clarified that assignment of the loan means 

acceptance of the loan and not necessarily the 

physical receipt of the loan documentation, 

recognizing that acceptance and payment are often 

done electronically. However, physical receipt of 

the loan documents by the FCU should occur 

within a reasonable time following acceptance of 

the loan. 63 FR 70997, 70998 (Dec. 23, 1998); see 

also NCUA Legal Op. 97–0546 (Aug. 6, 1997) 

(Concluding that an indirect lending arrangement 

where the retailer made a loan and assigned it to 

the purchasing credit union within one business 

day met the ‘‘very soon after’’ timing requirement.). 

66 63 FR 41976, 41977 (Aug. 6, 1998). 

67NCUA Call Report data for all FICUs from the 

4th quarter of 2015 through the 2nd quarter of 2022. 

68NCUA Call Report data for all FICUs from the 

4th quarter of 2015 through the 4th quarter of 2021. 

69NCUA Call Report data for all FICUs from the 

4th quarter of 2015 through the 4th quarter of 2022. 

70 Id. 

71 Id. 

such as an auto dealer.56 Current 

§ 701.22(a) defines the term ‘‘originating 

lender’’ as ‘‘the participant with which 

the borrower initially or originally 

contracts for a loan and who, thereafter 

or concurrently with the funding of the 

loan, sells participations to other 

lenders.’’ 57 The 2015 Opinion 

explained that, in indirect lending 

arrangements with a retailer such as an 

auto dealer, the retailer is acting as an 

agent of the eligible organization and is 

simply performing as an administrative 

functionary processing a loan for the 

eligible organization, and the retailer’s 

activities are part and parcel of, and an 

extension of, the eligible organization’s 

lending operations. In this context, the 

2015 Opinion concluded that the 

retailer is not acting as a separate lender 

generating loans for itself and then 

selling those loans to an eligible 

organization. Rather, the retailer is a 

facilitator that is part of the eligible 

organization’s loan processing 

mechanism, and the eligible 

organization is the de facto originating 

lender and, therefore, the originating 

lender for purposes of the NCUA’s loan 

participation rule. 

The 2015 Opinion explained further 

that a loan purchased by an eligible 

organization must satisfy two conditions 

to be classified as an ‘‘indirect loan’’ 

and not the purchase of a loan.58 First, 

the eligible organization must make the 

final underwriting decision regarding 

the loan. In other words, a loan must be 

underwritten by the purchasing eligible 

organization before completion of the 

loan or sales contract.59 An eligible 

organization may use an automated 

credit scoring system to make its final 

underwriting decision as long as the 

‘‘score’’ obtained from the automated 

system is the sole determinant for 

granting credit.60 When an eligible 

organization establishes the qualifying 

criteria for the automated scoring 

system, it is effectively making an 

advance decision on a particular 

application.61 So long as the party 

entering the borrower’s application 

information does not exercise any 

judgment regarding that information, 

the score will be deemed to reflect the 

FCU’s lending policies.62

Second, the sales contract must be 

assigned to the eligible organization 

very soon after it is signed by the 

borrower and the dealer.63 As explained 

in a separate NCUA legal opinion, 

assignment close in time to the making 

of the loan allows the retailer to 

function as the facilitator of the loan 

while the eligible organization remains 

the true lender.64 The length of time that 

satisfies ‘‘very soon after’’ depends on 

the nature of the loan and the practical 

realities of assigning certain kinds of 

loans in the current marketplace and in 

accordance with prevailing industry 

standards.65 While ‘‘very soon after’’ is 

generally determined on a case-by-case 

basis by loan type and in accordance 

with commercial reasonableness, the 

longer the time between the formation 

of the contract and its assignment, the 

more likely the program will be viewed 

as involving the purchase of an eligible 

obligation rather than the making of a 

loan.66

The Board believes that codifying the 

2015 Opinion will clarify the loan 

participations rule and facilitate further 

growth in credit unions’ purchase and 

sale of indirect loan participations. 

Industry data shows significant growth 

in credit unions engaging in indirect 

lending programs, which have become 

an important channel for credit unions 

to extend services to their members and 

provide a viable source of income to 

support their growth. 

Since 2015, FICUs have experienced 

large growth in indirect lending 

programs as reflected in Table 1. The 

$336.8 billion outstanding balance of 

indirect loans as of 2022 more than 

doubled the 2015 year-end loan 

balance.67

During the past 7 years, FICUs’ 

indirect lending activities had doubledigit increases (ranging from 14 percent 

to 21 percent) year over year between 

2016 and 2018, and a low single-digit 

increase in 2019 and 2020.68 The speed 

of growth went back to double digits in 

2021 and 2022, with FICUs reporting an 

aggregate 30.93 percent increase during 

2022.69 The share of indirect loans 

outstanding in FICUs’ total loan 

portfolio increased from 17.35 percent 

in 2015 to 21.22 percent in 2018, and 

reached 22.36 percent as of 2022.70

Furthermore, between 2015 and 2022, 

the delinquency rate on the indirect 

lending program was relatively stable, 

ranging from 0.77 percent to 0.47 

percent, while the net charge-off rate 

ranged between 0.70 percent and 0.24 

percent.71

TABLE 1—FICU INDIRECT LENDING ACTIVITIES 72

(in $ million) 2015 2016 2017 2018 2019 2020 2021 2022 

Total Outstanding Indirect Loans ..................................... 136,583 165,171 194,016 221,477 228,559 233,161 257,271 336,845 

% Year over Year Growth ............................................... 20.29 20.93 17.46 14.15 3.20 2.01 10.34 30.93 

% Indirect Loans Outstanding/Total Loans ..................... 17.35 19.00 20.27 21.22 20.63 20.05 20.50 22.36 

Total Del. Indirect Loans (>=60 Days) ............................. 988 1,264 1,391 1,494 1,513 1,291 1,198 2,479 

% Loans Delinquent >=60 Days/Total Indirect Loans ..... 0.72 0.77 0.72 0.67 0.66 0.55 0.47 0.74 

Net Indirect Loan Charge-Offs ......................................... 782 997 1,264 1,318 1,354 1,129 594 903 


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72 Id. 

TABLE 1—FICU INDIRECT LENDING ACTIVITIES 72—Continued 

(in $ million) 2015 2016 2017 2018 2019 2020 2021 2022 

% Net Charge-Offs/Avg Indirect Loans ........................... 0.63 0.66 0.70 0.63 0.60 0.49 0.24 0.30 

For the reasons discussed previously, 

and consistent with sections 107(5) and 

107(5)(E) of the Act and the 2015 

Opinion, the Board is codifying into the 

NCUA’s regulations its interpretation 

that an eligible organization may be 

considered an ‘‘originating lender’’ for 

purposes of § 701.22 where the eligible 

organization generates a loan through an 

indirect lending arrangement. Moreover, 

the Board is clarifying in the regulation 

that any ‘‘eligible organization’’—as the 

term is defined under § 701.22(a)—that 

acquires a loan through an indirect 

lending arrangement acts as the 

originating lender for purposes of 

§ 701.22, provided the eligible 

organization made the final 

underwriting decision regarding making 

the loan and was assigned the loan or 

sales contract very soon after the 

inception of the obligation to extend 

credit. In such cases, the Board 

considers the third party processing the 

loan to be an agent of the eligible 

organization that performs as an 

administrative functionary processing 

the loan for the eligible organization, 

and the third party’s activities are part 

and parcel, and an extension, of the 

eligible organization’s lending 

operations. 

Where an indirect loan is 

underwritten by the purchasing eligible 

organization before the loan is made and 

the loan is transferred to the eligible 

organization very soon after the 

inception of the obligation to extend 

credit, the Board believes there is little 

risk the loan will not be underwritten to 

the eligible organization’s standards. 

Accordingly, the final rule amends 

current § 701.22(a) by adding to the end 

of the definition of ‘‘originating lender’’ 

a second clarifying sentence providing 

that the originating lender includes a 

participant that acquires a loan through 

an indirect lending arrangement as 

defined under § 701.21(c)(9). Proposed 

paragraph (c)(9) provides in relevant 

part that indirect lending arrangement 

means a written agreement to purchase 

loans from the loan originator where the 

purchaser makes the final underwriting 

decision regarding making the loan, and 

the loan is assigned to the purchaser 

very soon after the inception of the 

obligation to extend credit. 

The Board requested comment in the 

proposal on whether there are certain 

types of transactions that should be 

excluded from the interpretation above. 

In particular, the Board asked whether 

there are transactions in which eligible 

organizations acquire loans through 

indirect lending arrangements, but the 

third parties making the loans do not act 

as administrative functionaries 

processing the loan on behalf of the 

eligible organizations, and the third 

parties’ activities are not part and 

parcel, and an extension, of the eligible 

organizations’ lending operations. If 

there are transactions of this type, 

commenters were asked to explain why 

they should be excluded and provide 

information about the transactions and 

the specific activities undertaken by the 

parties. 

Public Comments 

All comments received on this issue 

supported revising the definition of 

‘‘originating lender’’ to codify the 2015 

Opinion. One commenter recommended 

the NCUA amend the definition of 

‘‘originating lender’’ further to recognize 

and separate the functions of the 

originator, initial lender and subsequent 

owner/purchaser. The commenter also 

recommended amending the definition 

to recognize the different point in time 

of the legal ownership of the loan even 

though such lending decisions are made 

in compliance with the underwriting 

stipulations of the credit union that 

buys the loan after the initial funding of 

the loan by the fintech/flow partner. 

The commenter suggested these 

additional changes are important 

because they would (a) follow the legal 

ownership of the loan, (b) place the 

responsibility on the originator to 

comply with the requisite regulations— 

for example, Consumer Financial 

Protection Bureau (CFPB) reporting— 

and (c) if future regulatory requirements 

are placed on the originator, there 

would be no confusion about which 

party is responsible for complying with 

such requirements. In the commenter’s 

opinion, the fintech originator should 

have responsibility for complying with 

regulations and the credit union’s due 

diligence should include an extensive 

review of the originator’s policies and 

procedures to ensure compliance with 

all regulations. 

Another commenter asked that the 

NCUA clarify further in the definition 

whether both the indirect loan source 

(e.g., dealer) and the purchasing credit 

union are ‘‘originators,’’ because the 

current language could cause 

interpretive confusion and raise 

questions as to Call Report instructions 

and other areas regarding what the 

scope of origination is versus other 

types of indirect lending, such as 

correspondent mortgage lending. The 

commenter explained that the language 

‘‘from the loan originator’’ in the 

definition suggests that when a broker 

closes a loan in the credit union’s name 

it is not an indirect loan, while prior 

interpretations have suggested that it 

might be. The commenter 

recommended, in particular, that the 

NCUA not use the word ‘‘originator’’ in 

the definition as it relates to sources of 

indirect loans because it introduces 

confusion about the meanings of terms 

under the 2015 Opinion and prior 

doctrine. 

Discussion 

The comments received regarding the 

changes to the definition of ‘‘originating 

lender’’ all generally supported the 

proposed change. The NCUA did, 

however, receive comments requesting 

additional changes to the proposed 

definition of ‘‘originating lender’’ and 

the associated definition of ‘‘indirect 

lending arrangement’’ in 

§ 701.21(c)(9)(i). Those additional 

changes go beyond the scope of the 

proposed rule and will be retained for 

consideration by the NCUA during 

future rulemakings relating to indirect 

lending. Accordingly, the final rule 

adopts the changes to the definition of 

‘‘originating lender’’ in § 701.22(a) as 

proposed for the reasons set forth in the 

notice of proposed rulemaking. 

Some commenters requested 

additional clarification regarding the 

relationship between the originating 

lender and indirect lender. The term 

‘‘originating lender’’ is defined in the 

final rule as the participant with which 

the borrower initially or originally 

contracts for a loan and who, thereafter, 

concurrently with the funding of the 

loan, sells participations to other 

lenders. Originating lender includes a 

participant that acquires a loan through 

an indirect lending arrangement as 

defined under § 701.21(c)(9). The term 

‘‘loan participation’’ is defined as a loan 

where one or more eligible 

organizations participate pursuant to a 

written agreement with the originating 

lender, and the written agreement 


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73 78 FR 37946, 37948 (June 25, 2013). 

74 Id. at 37949. 

75Emphasis added. 

76See 85 FR 22010 (April 21, 2020); 85 FR 83405 

(Dec. 22, 2020) (extending paragraph (e) through 

Dec. 31, 2021); and 86 FR 72517 (Dec. 22, 2021) 

(extending paragraph (e) through Dec. 31, 2022). 

77 85 FR 22010, 22010 (April 21, 2020). 

requires the originating lender’s 

continuing participation throughout the 

life of the loan. For purposes of the 

NCUA’s regulations, a FICU acquiring a 

loan through an indirect lending 

arrangement is the originating lender. 

The acquiring FICU, however, may not 

be considered the originator under other 

applicable state laws, federal laws, or 

both. In such cases, the acquiring FICU 

is generally required to comply with all 

applicable laws. 

Under § 701.22(b), a FICU may 

purchase a participation interest in a 

loan from an eligible organization only 

if the loan is one the purchasing credit 

union is empowered to grant and certain 

additional conditions are satisfied. Both 

the current rule and this final rule limit 

purchases of loan participations to 

purchases from eligible organizations. 

An ‘‘eligible organization’’ is defined in 

the current and final rule as a credit 

union, credit union organization, or 

financial organization. The term 

‘‘financial organization’’ is defined 

under the current and final rule as any 

federally chartered or federally insured 

financial institution and any state or 

federal government agency and its 

subdivisions. This final rule makes no 

changes to either definition. The term 

‘‘financial organization’’ includes 

participants outside the credit union 

industry, including federally chartered 

and federally insured financial 

institutions, such as banks, and state 

and federal government agencies and 

their subdivisions.73 In addition, the 

current and final rule’s definition of 

‘‘eligible organization’’ includes nonfederally insured or non-federally 

chartered credit unions through the 

definition’s use of the term ‘‘credit 

union.’’ 74

Additional concerns? The Board 

requested comment in the proposal on 

whether there are other factors, changes, 

safety and soundness, or compliance 

implications the NCUA should consider 

related to the proposed amendments to 

the definition of ‘‘originating lender.’’ 

The Board asked further whether there 

are structural, safety and soundness, or 

compliance concerns that would 

warrant considering that the addition of 

intermediaries in loan origination 

transactions, including CUSOs, 

precludes a credit union assignee from 

being considered the originating lender 

under the revised definition in the 

proposed rule. Finally, the Board asked 

whether there are any additional safety 

and soundness or compliance 

implications concerning the proposed 

definition of ‘‘originating lender’’ that 

the Board should consider. 

Public Comments 

One commenter responded that, in 

many instances, CUSOs assist credit 

unions with various aspects of the loan 

origination process. The commenter 

explained that CUSOs may provide 

specific expertise (such as in member 

business loans) or other services to 

assist in credit unions making 

appropriate decisions; however, the 

credit union is still funding the loan 

according to its own guidelines (or as 

agreed upon through a CUSO) and 

should be considered the originating 

lender. 

Discussion 

The Board appreciates the comment 

above and notes that the final rule does 

not affect the ability of CUSOs to 

provide loan support services to FICUs 

under part 712 of the NCUA’s 

regulations and that simply providing 

loan support services does not 

necessarily change what entity is the 

originating lender. 

Section 701.22(e) Temporary Regulatory 

Relief in Response to COVID–19 

From April 21, 2020, to December 31, 

2022, § 701.22(e) of the NCUA’s 

regulations provided that, 

notwithstanding paragraph (b)(5)(ii) of 

§ 701.22, during the period commencing 

on April 21, 2020, and concluding on 

December 31, 2022, the aggregate 

amount of loan participations that may 

be purchased from any one originating 

lender shall not exceed the greater of 

$5,000,000 or 200 percent of the FICU’s 

net worth.75 The Board approved 

§ 701.22(e) to help ensure that FICUs 

remained operational and had sufficient 

liquidity during the COVID–19 

pandemic.76 The Board concluded, at 

the time, that the amendments would 

provide FICUs with the necessary 

flexibility in a manner consistent with 

the NCUA’s responsibility to maintain 

the safety and soundness of the credit 

union system.77 As provided in 

paragraph (e), the temporary regulatory 

relief provided under the paragraph 

expired on December 31, 2022. Because 

the temporary regulatory relief has 

expired, the Office of the Federal 

Register removed paragraph (e) shortly 

after December 31, 2022, as part of its 

regular review and editing process. 

Public Comments 

Three commenters recommended the 

NCUA extend or permanently adopt 

expired section 701.22(e)’s higher loan 

participation purchasing threshold. One 

of the commenters suggested that loan 

participation agreements generally have 

high fixed costs and comparatively 

modest variable costs so a $10 million 

loan participation agreement does not 

require significantly more due diligence 

or post-closing resources, from either a 

loan originator or potential loan 

participation interest purchasers, than a 

$2 million loan participation agreement. 

Consequently, individual loan 

participation interests generally 

represent larger rather than smaller 

capital commitments. Another 

commenter suggested that the United 

States is currently entering a period of 

declining liquidity access, raising 

concerns among FICUs about their 

ability to access liquidity. The 

commenter suggested the relief 

provided in § 701.22(e) would be more 

useful now than it was during the 

pandemic as the liquidity tightness the 

credit unions see now is due to the 

business cycle. The commenter 

suggested further that a permanent 

variation of this rule would not harm 

the safety and soundness of the credit 

union system, and as such, it asked the 

NCUA to reconsider removing this rule. 

One of the commenters suggested 

raising the aggregate amount of loan 

participations that may be purchased 

may decrease overall risks because it 

allows individual credit unions to 

develop relationships and trust with 

each other with ongoing transactions 

that reduce costs and risks for both. 

Five commenters recommended the 

NCUA eliminate the limit on the 

aggregate amount of loan participations 

that may be purchased from any one 

originating lender altogether. 

Discussion 

The Board appreciates the comments 

that were submitted regarding 

expiration of the temporary regulatory 

relief under § 701.22(e). The temporary 

regulatory relief provided under 

paragraph (e) expired on December 31, 

2022. The Board may consider 

approving temporary regulatory relief 

again in the future if circumstances 

warrant. 

Benefits of the temporary regulatory 

relief. The Board requested comments 

on the impact, if any, that was 

experienced due to the flexibilities 

provided in the temporary rule; whether 

the temporary rule had any effect on the 

participation markets; and whether 

there are safety and soundness or 


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67584 Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / Rules and Regulations 

78 78 FR 37946 (June 25, 2013). 

compliance implications related to the 

expiration of the flexibilities. 

Public Comments 

One commenter responded to the 

NCUA’s questions by stating that the 

change did not have a material effect on 

credit unions because it was temporary 

in nature but noted that the change did 

allow some credit unions to manage 

their balance sheets in a more effective 

manner during the relief period. The 

commenter suggested further that credit 

unions that benefited from the 

temporary regulatory relief may now be 

unable to work with those sellers/buyers 

again even though they have established 

strong relationships due to expiration of 

the temporary regulatory relief. 

Discussion 

The Board appreciates the comment 

that was submitted regarding the 

benefits of the temporary regulatory 

relief under § 701.22(e). The Board may 

consider approving temporary 

regulatory relief again in the future if 

circumstances warrant. 

Other comments on the loan 

participation rule. The Board also 

invited other recommendations it 

should consider in the loan 

participation rule. For example, the 

Board asked whether it should consider 

replacing prescriptive limits with 

principles-based requirements, consider 

removing the limit on the amount of 

loan participations that could be 

purchased from any one originating 

lender under current § 701.22(b)(5)(ii), 

or both. 

Public Comments 

One commenter responded to the 

NCUA’s questions by stating that 

eliminating the prescriptive limits and 

replacing them with principles-based 

requirements allows credit unions the 

most flexibility in managing their 

balance sheets. The commenter 

suggested that credit unions have 

proven the ability to manage their risk 

levels with many other prescriptive 

limits being removed. 

Discussion 

The Board appreciates the comment 

above and will consider replacing 

prescriptive limits with more 

principles-based requirements where 

appropriate in future rulemakings. 

Section 701.23 Purchase, Sale, and 

Pledge of Loans 

As discussed in more detail in this 

portion of the preamble, this final rule 

makes several changes to current 

§ 701.23 of the NCUA’s regulations. 

These changes are intended to clarify 

numerous provisions regarding the 

purchase, sale, and pledge of eligible 

obligations. The changes also provide 

FCUs expanded authority and autonomy 

to innovate and transact business with 

fintech companies and other institutions 

that provide services associated with the 

origination and sale of loans made to 

members of FCUs. 

In addition, the final rule adds new 

headings to a number of subparagraphs 

under § 701.23. The addition of these 

headings is a non-substantive change to 

both the current regulation and 

proposed § 701.23, which is intended to 

add consistency to the section as well as 

make the section more reader friendly. 

In addition to the other changes 

discussed in this part of the preamble, 

the final rule adds the following new 

headings to § 701.23. Paragraph (b)(1) is 

amended to add the heading purchase 

of obligations from any source. 

Paragraph (b)(1)(i) is amended to add 

the heading eligible obligations. 

Paragraph (b)(1)(ii) is amended to add 

the heading notes of a liquidating credit 

union’s individual members. Paragraph 

(b)(1)(iii) is amended to add the heading 

student loans. Paragraph (b)(1)(iv) is 

amended to add the heading real estatesecured loans. Paragraph (b)(3) is 

amended to add the heading other 

requirements. Paragraph (b)(4) is 

amended to add the heading fivepercent limitation. Paragraph (b)(5) 

retains the heading grandfathered 

purchases from the current rule. 

Paragraph (b)(6) is amended to add the 

heading written purchase policies. 

Paragraph (h)(1) is amended to add the 

heading expanded purchase authority. 

Public Comments 

Several commenters specifically 

offered strong support for the proposed 

edits to § 701.23. One commenter agreed 

that removing some of the limits in the 

current regulation will greatly improve 

credit union activity with eligible 

obligations and allow members to be 

served within the industry without 

incremental risk being placed on the 

Share Insurance Fund. Another 

commenter suggested that the clarifying 

language on eligible obligations and 

removal of the prescriptive limitations 

will eliminate ambiguity on the 

interpretation regarding permissible 

activities. Another commenter 

supported the proposed changes but 

thought more should be done to reduce 

confusion regarding whether §§ 701.22 

or 701.23 applies to a particular 

transaction. One commenter stated that 

FISCUs should also benefit from this 

rule pursuant to state credit union act 

parity statutes. The commenter 

recommended finalizing the 

amendments to § 701.23 as proposed. 

The commenter, however, also 

recommended that the NCUA clarify in 

the loan participation and eligible 

obligation rules that a purchasing FICU 

has discretion to classify a partial 

interest in a loan under either Section 

701.22 or 701.23 when the terms and 

conditions of the purchase meet the 

requirements of both rules. As an 

alternative, the commenter requested 

that, even if credit unions are obligated 

to designate a transaction as a loan 

participation or eligible obligation at or 

near the time of the sale/purchase (for 

example on a subsequent Call Report), 

credit unions be given discretion to 

change that designation at a later time 

if they choose so long as the terms and 

conditions of the purchase meet the 

requirements of both rules. The 

commenter suggested this change could 

be made by adding new paragraphs to 

§§ 701.22 and .23 providing as follows: 

Each FICU that is party to a transaction 

may choose to categorize it as either a 

transaction under this rule [§ 701.22 or 

§ 701.23], or alternatively as a transaction 

under [§ 701.22 or § 701.23], and may 

designate it as such as necessary (for example 

on a Call Report). FICUs that are party to the 

same transaction do not have to categorize or 

designate the transaction in the same 

manner, and FICUs retain discretion to 

recategorize and redesignate the transaction 

from time to time. 

Discussion 

Consistent with the strong support 

received from commenters, the Board is 

adopting the changes to § 701.23 largely 

as proposed, for the reasons set forth in 

the notice of proposed rulemaking, with 

certain changes that are discussed in the 

section-by-section analysis below. The 

changes and clarifications requested in 

the comments above would expand the 

authorities proposed beyond the scope 

of the proposed rule. Thus, the 

comments will be retained for 

consideration in future rulemakings 

relating to loan purchases. 

Section 701.23 Introductory Paragraph 

The Board added the introductory 

paragraph to § 701.23 as part of the 2013 

Final Rule.78 The introductory 

paragraph was added to clarify several 

issues related to the scope and 

applicability of § 701.23. In particular, 

the 2013 Final Rule explained that the 

rule added introductory text to § 701.23 

to clarify the scope of § 701.23 and to 

distinguish transactions under § 701.23 

from transactions covered by § 701.22. 

The 2013 Final Rule explained further 

that RegFlex provides a limited 


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Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / Rules and Regulations 67585 

79 12 CFR 701.23(b)(2). 

80 78 FR 37954–37955. 

81Emphasis added. 

82Authorizing FCUs to purchase eligible 

obligations of a liquidating credit union’s 

individual members, from the liquidating credit 

union. 

exception to the general requirement 

that an FCU’s purchase, sale, or pledge 

of all or part of a loan must be to one 

of its own members.79 Specifically, the 

2013 final rule explained that the 

exception permits FCUs that meet the 

well-capitalized standard to buy loans 

from other FICUs without regard to 

whether the loans are eligible 

obligations of the purchasing FCU’s 

members or the members of a 

liquidating credit union. The 2013 Final 

Rule also explained that it made a 

parallel conforming amendment to the 

introductory text to § 701.22 in this 

regard.80

The introductory paragraph to current 

§ 701.23 includes three sentences. The 

first sentence provides that the section 

governs an FCU’s purchase, sale, or 

pledge of all or part of a loan to one of 

its own members where no continuing 

contractual obligation is contemplated 

between the seller and the purchaser. 

The first sentence also notes that there 

is a limited exception to the 

membership requirement for certain 

well-capitalized FCUs. The second 

sentence elaborates on the membership 

requirement by providing that the 

borrower must be a member of the 

purchasing FCU before the purchase is 

made, except as provided in current 

§ 701.23(b)(2). The third sentence 

provides broadly that an FCU may not 

purchase a non-member loan to hold in 

its portfolio. 

Since amending § 701.23 as part of the 

2013 Final Rule, the NCUA has received 

numerous inquiries from NCUA 

examiners, FCUs, fintech companies, 

and other parties who have expressed 

confusion about how to interpret these 

provisions. This confusion has led to 

inconsistent reporting of loan interests 

by FCUs and uncertainty regarding 

which of the two sections, § 701.22 or 

§ 701.23, applies to certain transactions, 

particularly innovative programs that 

have been designed by FICUs after 2013. 

In addition, the Board is concerned that 

continued confusion about when a 

borrower is required to be a member 

under § 701.23 could discourage FCUs 

from entering into certain safe and 

sound loan purchase, sale, and pledge 

agreements that are within their 

statutory authority. 

The clause in the first sentence of the 

introductory paragraph to current 

§ 701.23, which provides ‘‘where no 

continuing contractual obligation 

between the seller and purchaser is 

contemplated,’’ continues to be a source 

of confusion for examiners and the 

credit union system. As previously 

mentioned, loan purchase agreements, 

regardless of whether the transactions 

involve the purchase of an eligible 

obligation or a loan participation, 

frequently contain some form of 

continuing contractual obligation 

between the buyer and the seller, 

including representations and 

warranties regarding the loans and loan 

repurchase agreements, servicing 

agreements, and other similar types of 

ongoing obligations. Accordingly, the 

final rule deletes the continuing 

contractual obligations clause in current 

§ 701.23. The Board intends this 

deletion to work in conjunction with the 

proposed changes to the introductory 

paragraph to current § 701.22. 

The final rule also removes the clause 

in the first sentence of the introductory 

paragraph to current § 701.23 referring 

to the limited exception for wellcapitalized FCUs. As discussed in more 

detail subsequently in the part of the 

preamble on § 701.23(b)(2), the final 

rule removes the well-capitalized 

requirements for FCU purchases of 

certain non-member loans from FICUs. 

Accordingly, deleting the clause in the 

introductory paragraph referring to the 

limited exception for well-capitalized 

FCUs is a necessary conforming 

amendment. 

The second sentence in the 

introductory paragraph to current 

§ 701.23 provides that for purchases of 

eligible obligations, except as described 

in paragraph (b)(2) of the section, the 

borrower must be a member of the 

purchasing FCU before the purchase is 

made. As discussed previously, there 

are express exceptions to the 

membership requirement under 

paragraph (b)(1) as well as under 

paragraph (b)(2). For example, 

paragraphs (b)(1)(iii) and (iv) authorize 

FCUs to buy non-member loans to 

complete a pool of loans for resale. 

Accordingly, the final rule amends the 

second sentence in the introductory 

paragraph to current § 701.23 to provide 

that for purchases of eligible obligations, 

except as described under paragraph (b) 

of the section, the borrower must be a 

member of the purchasing FCU before 

the purchase is made. 

The third sentence in the introductory 

paragraph to current § 701.23 provides 

that an FCU may not purchase a nonmember loan to hold in its portfolio. 

This prohibition appears to have 

originally been intended to address FCU 

purchases of non-member loans to 

complete pools of loans for resale, as 

authorized for real estate-secured loans 

and federally guaranteed student loans 

under current § 701.23(b)(1)(iii) and (iv). 

The prohibition on retaining the nonmember loans in portfolio goes together 

with the authority in paragraphs 

(b)(1)(iii) and (iv) because those 

provisions allow an FCU to buy such 

non-member loans solely to complete a 

pool of loans for resale. The second 

sentence in current § 701.23(b)(1)(iv) 

further confirms this relationship by 

providing that a pool must include a 

substantial portion of the credit union’s 

members’ loans and must be sold 

promptly.81 For other purchases of nonmember loans under current § 701.23, 

the authority is not tied to a plan or 

requirement to resell the loans being 

purchased. Prohibiting the FCU from 

retaining the loans in portfolio, as the 

current wording in the undesignated 

introductory paragraph implies, 

unnecessarily restricts FCUs’ authority 

to purchase and hold non-member loans 

from FICUs under current 

§ 701.23(b)(1)(ii) 82 and (b)(2). 

Accordingly, the final rule deletes the 

third sentence in the introductory 

paragraph to § 701.23, providing that an 

FCU may not purchase a non-member 

loan to hold in its portfolio. 

For the reasons outlined in the 

preceding paragraphs, the final rule 

amends the introductory text of § 701.23 

to provide that the section governs an 

FCU’s purchase, sale, or pledge of all or 

part of a loan to one of its own 

members, subject to certain exceptions. 

The introductory paragraph provides 

further that for purchases of eligible 

obligations, except as otherwise 

described under paragraph (b) of 

§ 701.23, the borrower must be a 

member of the purchasing FCU before 

the purchase is made. 

Public Comments 

Three commenters specifically 

expressed their support for the 

clarifying amendments to the 

introductory paragraph to § 701.23. 

Another commenter offered support for 

removing the following sentence: ‘‘A 

federal credit union may not purchase a 

non-member loan to hold in its 

portfolio.’’ And one commenter 

recommended amending the second 

sentence of the introductory paragraph 

to clarify that an FCU may purchase 

certain eligible obligations prior to the 

borrower becoming a member of the 

purchasing FCU under §§ 701.23(b)(1) 

and 701.23(b)(2). 

Discussion 

The comments received on the 

changes to the introductory paragraph to 

701.23 were strongly supportive. The 


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67586 Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / Rules and Regulations 

83See, e.g., §§ 701.23(b)(1)(ii), (b)(2)(ii), and 

(b)(4). 

84Section 1757(13) (authorizing FCUs, in 

accordance with rules and regulations prescribed by 

the Board, to purchase, sell, pledge, or discount or 

otherwise receive or dispose of, in whole or in part, 

any eligible obligations (as defined by the Board) of 

its members and to purchase from any liquidating 

credit union notes made by individual members of 

the liquidating credit union at such prices as may 

be agreed upon by the board of directors of the 

liquidating credit union and the board of directors 

of the purchasing credit union, but no purchase 

may be made under authority of this paragraph if, 

upon the making of that purchase, the aggregate of 

the unpaid balances of notes purchased under 

authority of this paragraph would exceed 5 per 

centum of the unimpaired capital and surplus of the 

credit union[.]). 

85The new definition of eligible obligation 

excludes notes held by a liquidating credit union. 

86See 78 FR 37946, 37948 (June 25, 2013) 

(providing in part as follows: ‘‘[The introductory 

paragraph to § 701.22] clarifies that the [section] 

applies to a [consumer] FICU’s purchase of a loan 

participation where the borrower is not a member 

of that credit union. Generally, an FCU’s purchase, 

in whole or in part, of its member’s loan is covered 

by NCUA’s eligible obligations rule at § 701.23.’’ 

The 2013 Final Rule also notes in FN 2 that there 

is ‘‘a limited exception for certain well-capitalized 

federal credit unions to purchase, subject to certain 

conditions, non-member eligible obligations from a 

FICU. 12 CFR 701.23(b)(2).’’); see also, 12 U.S.C. 

1757(13) (providing in part that an FCU shall have 

power, ‘‘in accordance with rules and regulations 

prescribed by the Board, to purchase, sell, pledge, 

or discount or otherwise receive or dispose of, in 

whole or in part, any eligible obligations (as defined 

by the Board) of its members.’’ (emphasis added)). 

87Note that the definition of a participation 

interest under GAAP (see ASC 860–10–40–6A) is 

not the same as the definition of a loan 

participation under § 701.22 of the NCUA’s 

regulations. 

comment requesting that the Board 

allow purchases of certain eligible 

obligations prior to the borrower 

becoming a member goes beyond the 

scope of the proposal. Accordingly, the 

Board is adopting the changes to the 

introductory paragraph as proposed for 

the reasons set forth in the notice of 

proposed rulemaking. 

Section 701.23(a) Definitions 

The final rule, in addition to other 

changes discussed below, amends 

current § 701.23(a) to add the heading 

‘‘Definitions’’ to the paragraph and 

remove the numbering from the 

individual definitions under paragraph 

(a). These changes are intended to avoid 

errors and confusion when definitions 

in paragraph (a), which may be cross 

referenced elsewhere in the NCUA’s 

regulations, are added or removed. 

Accordingly, the individual definitions 

included under § 701.23(a) are listed in 

alphabetical order but not numbered 

individually. 

Eligible obligation. 

The final rule amends the definition 

of eligible obligation under § 701.23(a) 

to clearly distinguish between an 

eligible obligation and a note held by a 

liquidating credit union. Current 

§ 701.23(a) defines the term ‘‘eligible 

obligation’’ broadly to mean a loan or 

group of loans, which includes the notes 

of a liquidating credit union.83 As 

explained in the part of the preamble on 

§ 701.23(b)(4), the statutory 5-percent 

limitation on the aggregate of the unpaid 

balance of notes purchased under 

§ 701.23 applies only to notes of 

liquidating credit unions and not to 

eligible obligations as that term is 

generally used under section 107(13) 84

of the Act. Accordingly, the final rule 

amends the definition of eligible 

obligation to clarify that the term does 

not include a note held by a liquidating 

credit union.85

The final rule also amends the 

definition of eligible obligation to clarify 

that the term includes a whole loan or 

part of a loan. The NCUA has long held 

the position that the term ‘‘eligible 

obligation’’ includes loans, in whole or 

in part, provided the loan does not meet 

the definition of a loan participation 

under § 701.22(a).86 The Board believes 

that the amended definition of an 

eligible obligation will provide clarity 

and reduce confusion in the credit 

union system concerning when a 

transaction involving a loan purchased 

in part (a partial loan) meets the 

regulatory definition of an eligible 

obligation. Many credit union officials 

find the current eligible obligations rule 

unclear, specifically when attempting to 

determine which rule applies to a loan 

purchased in part. The amended 

definition will help FCU officials to 

differentiate between transactions 

involving partial loan purchases that 

meet the definition of an eligible 

obligation under § 701.23 and 

transactions involving partial loan 

purchases that meet the definition of a 

loan participation under § 701.22. 

Current § 701.22(a) provides that loan 

participation means a loan where one or 

more eligible organizations participate 

pursuant to a written agreement with 

the originating lender, and the written 

agreement requires the originating 

lender’s continuing participation 

throughout the life of the loan. For 

example, if an FCU purchases a partial 

loan that does not meet the definition of 

loan participation under amended 

§ 701.22(a), then the transaction may 

still be permissible provided it meets 

the definition of an ‘‘eligible obligation’’ 

under amended § 701.23(a) and meets 

the requirements under that section. 

The final rule also amends the 

definition of ‘‘eligible obligation’’ to 

remove the words ‘‘group of loans.’’ The 

words are redundant because the term 

‘‘eligible obligation’’ is used in its plural 

form, eligible obligations, throughout 

proposed and current § 701.23 to 

indicate where the section authorizes or 

applies to the purchase of one or more 

loans. The Board believes removing the 

phrase ‘‘group of loans,’’ in conjunction 

with the other changes discussed in this 

proposal, will clarify the definition of 

eligible obligation. Accordingly, for all 

the reasons discussed above, proposed 

§ 701.23(a) would provide that eligible 

obligation means a whole loan or part of 

a loan (other than a note held by a 

liquidating credit union) that does not 

meet the definition of a loan 

participation under § 701.22(a). 

Public Comments 

Four commenters specifically 

expressed support for the revised 

definition of eligible obligation as 

proposed. Two commenters 

recommended further clarifying the 

definition of eligible obligation. One of 

those commenters explained that further 

defining the term would allow credit 

unions the ability to understand the 

accounting and loss reserve 

ramifications on how the loan is sold. 

The commenter also asked the following 

two clarifying questions: (1) If a credit 

union sells a tranche in a portfolio of 

loans would this constitute an eligible 

obligation? And (2) what if a credit 

union sold just the interest portion of a 

loan? 

Discussion 

The comments received on the 

revised definition of eligible obligation 

were generally supportive. Two 

commenters did request further 

clarifying the definition; however one 

commenter did not specify what aspects 

of the proposed definition were 

confusing or how the definition could 

be clarified. The other commenter asked 

questions, which are addressed below. 

Given the lack of objections to the 

proposed definition, other than general 

requests for further clarification, the 

Board is adopting the definition of 

eligible obligation as proposed for the 

reasons set forth in the notice of 

proposed rulemaking. 

Regarding the commenter’s questions 

about selling a tranche in a portfolio of 

loans or only selling the interest 

receivable of a loan, the transaction 

must qualify for derecognition under 

generally accepted accounting 

principles (GAAP). Additionally, when 

a loan is sold in part under either 

§§ 701.22 or 701.23 of the NCUA’s 

regulations, the transaction must meet 

the definition of a participation interest 

under GAAP.87 This definition is 

applied at a loan level and not at the 


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Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / Rules and Regulations 67587 

88See Section 1757(13) (providing authority ‘‘to 

purchase from any liquidating credit union notes 

made by individual members of the liquidating 

credit union at such prices as may be agreed upon 

by the board of directors of the liquidating credit 

union and the board of directors of the purchasing 

credit union, but no purchase may be made under 

authority of this paragraph if, upon the making of 

that purchase, the aggregate of the unpaid balances 

of notes purchased under authority of this 

paragraph would exceed 5 per centum of the 

unimpaired capital and surplus of the credit 

union;’’ (emphasis added).). 

89OGC Op. 04–0713 (Oct. 25, 2004); see also OGC 

Op. 02–0824 (Nov. 5, 2002) (noting that an FCU is 

not empowered to grant a loan with a prepayment 

penalty); and OGC Op. 01–1023 (Nov. 28, 2001) 

(noting that if an FICU meets all other requirements 

of the NCUA’s regulations, the fact that the credit 

union has not itself granted the type of loan in 

question does not mean it is not empowered to 

grant such a loan.). 

90 Id. 

portfolio level. If an interest in a loan is 

sold and does not meet the definition of 

a participation interest under GAAP, in 

general, the transaction must be 

recorded as a secured borrowing. To 

meet the definition of a participation 

interest under GAAP, the transferor 

generally must sell a pro-rata share of 

principal and interest, except for 

market-based servicing fees. While the 

commenter did not provide sufficient 

details in their questions for the Board 

to provide definitive answers, the 

transactions would likely not qualify as 

the sale of a participation interest under 

GAAP and, therefore, generally are not 

covered by either §§ 701.22 or 701.23 of 

the NCUA’s regulations. In general, the 

purchaser must record the asset 

regardless of whether the seller qualifies 

for derecognition under GAAP. 

Liquidating credit union. 

The final rule adds a definition of 

liquidating credit union to § 701.23(a) to 

identify the point in time when a credit 

union becomes a liquidating credit 

union for purposes of applying the 5- 

percent limitation in § 701.23(b)(4). The 

term ‘‘liquidating credit union’’ is used 

but not defined in current § 701.23 

because the section does not distinguish 

between eligible obligations and notes 

of liquidating credit unions for purposes 

of calculating the 5-percent limitation 

on the aggregate of the unpaid balance 

of loans purchased under current 

§ 701.23(b)(1) and (b)(2)(ii). As 

explained in more detail later in the part 

of the preamble about proposed 

§ 701.23(b)(4), under this final rule, the 

5-percent limitation applies only to 

notes purchased from liquidating credit 

unions, making it necessary for the 

NCUA to specify the point in time when 

a credit union meets the definition of a 

liquidating credit union. Consistent 

with Congress’ use of the broad term 

‘‘credit union’’ in section 107(13) of the 

FCU Act, the definition of liquidating 

credit union would include both 

liquidating FICUs and liquidating credit 

unions not insured by the NCUA.88

Accordingly, the final rule provides 

that liquidating credit union means, (1) 

in the case of a voluntary liquidation, a 

credit union is a liquidating credit 

union as of the date the members vote 

to approve liquidation; and (2) in the 

case of an involuntary liquidation, a 

credit union is a liquidating credit 

union as of the date the board of 

directors is served an order of 

liquidation issued by either the NCUA 

or the state supervisory authority. 

Public Comments 

Four commenters expressed general 

support for adding the proposed 

definition of liquidating credit union. 

Discussion 

Given the support received from 

commenters, and the lack of objections, 

the Board is adopting the definition of 

liquidating credit union as proposed. 

Should other terms be defined? The 

Board requested comment on whether 

there are additional terms used in 

§ 701.23, such as ‘‘empowered to grant,’’ 

that it should consider defining or 

further clarifying in future rulemakings. 

Public Comments 

Two commenters responded that the 

NCUA should not define the term 

‘‘empowered to grant.’’ One of the 

commenters explained that the term 

should remain undefined so it can be 

sufficiently flexible to fully incorporate 

credit unions’ currently recognized 

lending authorities and all those the 

NCUA recognizes in the future. On the 

other hand, one commenter responded 

that the term ‘‘empowered to grant’’ 

should be defined. The commenter 

explained that the term has a particular 

bearing on credit union activity under 

§ 701.22 and § 701.23 and has been 

addressed in several NCUA legal 

opinion letters over the years. The 

commenter recommended that the 

NCUA solicit specific feedback on what 

should and should not fall within the 

scope of ‘‘empowered to grant.’’ 

One commenter asked that the NCUA 

define the term ‘‘notes’’ to avoid any 

future confusion regarding the purchase 

of notes of liquidating credit unions. 

Another commenter specifically 

recommended the term ‘‘notes’’ not be 

defined or clarified further. 

Discussion 

The Board appreciates the detailed 

comments submitted regarding defining 

additional terms in § 701.23. While the 

comments received in this area go 

beyond the scope of this rulemaking, the 

comments will be retained for 

consideration by the NCUA during 

future rulemakings relating to the 

purchase, sale, and pledge of eligible 

obligations and notes of liquidating 

credit unions. 

In October 2004, the NCUA issued a 

legal opinion letter explaining that ‘‘the 

phrase ‘empowered to grant’ as used in 

[the] NCUA’s regulations refers to the 

authority of an FCU to make the type of 

loans permitted by the [FCU Act], 

NCUA regulations, FCU Bylaws, and its 

own internal policies.’’ 89 The letter goes 

on to explain that the phrase 

‘‘empowered to grant’’ does not include 

a membership requirement.90

Section 701.23(b) Purchase of Loans 

Current § 701.23(b) would be 

amended, as discussed in more detail 

later in this preamble, to make certain 

substantive changes and to implement 

clarifying and conforming changes 

consistent with amendments to other 

subsections. The final rule amends the 

heading to current § 701.23(b) to clarify 

which transactions are covered under 

the paragraph. The Board believes that 

this would result in only a minor 

technical change to current § 701.23(b). 

The heading for current paragraph (b) is 

‘‘Purchase.’’ The final rule adds the 

words ‘‘of loans’’ after the word 

‘‘purchase’’ to better clarify the type of 

transactions this section would apply to, 

that being the purchase of loans. 

Accordingly, the paragraph heading for 

proposed § 701.23(b) would be revised 

to read ‘‘Purchase of loans.’’ 

Section 701.23(b)(1) 

Section 701.23(b)(1)(ii) 

Current § 701.23(b)(1)(ii) authorizes 

FCUs to purchase certain eligible 

obligations of a liquidating credit 

union’s individual members from the 

liquidating credit union. As explained 

previously in the part of the preamble 

on § 701.23(a) regarding the definition 

of eligible obligation, notes of 

liquidating credit unions would no 

longer be included within the definition 

of eligible obligations. Consistent with 

that change, this final rule amends 

current § 701.23(b)(1)(ii) to remove the 

references to eligible obligations and 

authorize FCUs to purchase notes of a 

liquidating credit union’s individual 

members from the liquidating credit 

union. Accordingly, § 701.233(b)(1)(ii) is 

amended to provide that an FCU may, 

subject to the requirements in § 701.23, 

purchase notes of a liquidating credit 

union’s individual members, from the 

liquidating credit union. 


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67588 Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / Rules and Regulations 

91 66 FR 58656 (Nov. 23, 2001). 

92 66 FR 58656. 

93NCUA Call Report data for all FCUs as of the 

2nd quarter of 2022. 

94As of June 30, 2023, over 97 percent of FCUs 

were well-capitalized. Additionally, 78.5 percent of 

FCUs were rated a CAMELS composite 1 or 2 and 

these credit unions represented 95 percent of total 

FCU assets. 

Public Comments 

One commenter suggested that it 

understands keeping the 5-percent 

limitation on the purchase of these 

types of notes but believed the 

limitation could be eliminated because 

of (a) the relative rarity of liquidations, 

and (b) the NCUA’s role in approval of 

purchase and assumption transactions 

to select those who can manage safety 

and soundness concerns. 

Discussion 

Section 107(13) of the FCU Act, 

which authorizes the purchases of notes 

of a liquidating credit union’s members, 

provides that no purchase may be made 

under authority of this paragraph if, 

upon the making of that purchase, the 

aggregate of the unpaid balances of 

notes purchased under authority of this 

paragraph would exceed 5 per centum 

of the unimpaired capital and surplus of 

the credit union. Accordingly, the Board 

is adopting the changes to § 701.23(b)(4) 

and retaining the 5-percent limitation as 

proposed for the reasons set forth in the 

notice of proposed rulemaking. 

Section 701.23(b)(1)(iv) 

The word ‘‘mortgage’’ is misspelled in 

the first sentence of current 

§ 701.23(b)(1)(iv). The final rule amends 

§ 701.23(b)(1)(iv) to correct that 

misspelling. No substantive changes are 

made to current paragraph (b)(1)(iv). 

Section 701.23(b)(2) Purchase of 

Obligations From a FICU 

The final rule amends current 

§ 701.23(b)(2) to remove the CAMELS 

rating requirement and the capital 

classification requirements in the 

introductory paragraph. Current 

§ 701.23(b)(2) provides that an FCU that 

received a composite CAMELS rating of 

‘‘1’’ or ‘‘2’’ for the last two (2) full 

examinations and maintained a capital 

classification of ‘‘well capitalized’’ 

under part 702 of the chapter for the six 

(6) immediately preceding quarters may 

purchase and hold certain obligations, 

provided that it would be empowered to 

grant them. The final rule provides 

FCUs additional authority to purchase 

loans by removing the CAMELS rating 

and capital classification requirements. 

The CAMELS rating and capital 

classification requirements were added 

to the NCUA’s regulations as part of a 

2001 final rule regarding the NCUA’s 

RegFlex program.91 The 2001 final rule 

explained, in response to commenters 

suggestions that the requirements be 

removed, as follows: 

The Board continues to believe that 

CAMEL ratings and net worth ratios are the 

best measures of how well a credit union is 

managed and how much risk it presents to 

the NCUSIF and the credit union system. 

That is, consistent with safety and soundness 

concerns, credit unions with advanced levels 

of net worth and consistently strong 

supervisory examination ratings have earned 

exemptions from certain NCUA 

Regulations.92

FCUs have generally managed their 

loan purchase, sale, and pledge activity 

well since the addition of the CAMELS 

and capital requirements and continue 

to do so. Approximately 12 percent of 

FCUs were engaged in the purchase, 

sale, or pledge of loans during 2022.93

Additionally, the Board notes that this 

purchase authority is limited to 

purchases from a FICU. Therefore, the 

loans able to be purchased under this 

authority are already in the federally 

insured credit union system. Moving the 

obligation from one FICU to another 

FICU generally is not expected to result 

in a significant increase to the Share 

Insurance Fund’s risk exposure. 

Further, the current CAMELS and net 

worth restrictions are only applicable to 

a small segment of the credit union 

system given that the vast majority of 

FCUs have a CAMELS composite rating 

of 1 or 2 and are well-capitalized.94

Expansion of this authority would allow 

slightly more FCUs to purchase 

obligations from a FICU, potentially 

creating additional revenue and capital 

for the purchaser and providing an 

additional outlet for selling FICUs, 

creating additional liquidity channels in 

the credit union system. 

The NCUA believes any increased risk 

associated with removing the CAMELS 

rating and capital classification 

requirements in current § 701.23 would 

also be minimized by the addition of the 

proposed principles-based due 

diligence, risk assessment, and risk 

management requirements. Accordingly, 

the final rule amends the introductory 

paragraph to § 701.23(b)(2) to provide 

that an FCU may purchase and hold 

certain obligations if it would be 

empowered to grant them. 

Public Comments 

Twenty-six commenters offered their 

support for eliminating the CAMELS 

rating and capital classification 

requirements for the reasons provided 

in the proposal. One commenter 

suggested the change would allow a 

greater flow of funds between FCUs and 

FISCUs. The commenter suggested 

further that credit unions with CAMELS 

ratings of three and lower are negatively 

impacted by their current inability to 

access this market and allowing 

purchases of these obligations will help 

move them into a higher CAMELS 

rating. Another commenter suggested 

the proposed change will allow more 

FCUs to purchase obligations from a 

FICU, potentially creating additional 

revenue and capital for the purchaser 

and providing an additional outlet for 

selling FICUs, creating additional 

liquidity channels in the credit union 

system. Several commenters suggested 

that the proposed change will make sure 

smaller credit unions can also gain 

access to these loans and obtain some 

much-needed additional return on 

assets. The commenters also suggested 

the proposed change will allow larger 

credit unions to manage balance sheet 

risk by selling some of these loans to 

other credit unions without jeopardizing 

their relationships with non-credit 

union originators. 

Discussion 

Given the strong support expressed by 

commenters, and the lack of objections, 

the Board is adopting the changes to 

§ 701.23(b)(2) as proposed for the 

reasons set forth in the notice of 

proposed rulemaking. 

Section 701.23(b)(2)(ii) Notes of a 

Liquidating Credit Union 

Current § 701.23(b)(2)(ii) authorizes 

FCUs to purchase certain eligible 

obligations of a liquidating credit union 

without regard to whether they are 

obligations of the liquidating credit 

union’s individual members. As 

explained earlier in the part of the 

preamble on § 701.23(a) regarding the 

definition of eligible obligation, under 

this final rule notes of liquidating credit 

unions would no longer be included 

within the definition of eligible 

obligation. Consistent with that change, 

this final rule amends current 

§ 701.23(b)(2)(ii) to remove the words 

‘‘eligible obligations’’ and ‘‘obligations’’ 

and authorize FCUs to purchase notes of 

a liquidating credit union without 

regard to whether they are notes of the 

liquidating credit union’s individual 

members. 

Section 701.23(b)(3) 

Section 701.23(b)(3)(ii) 

The final rule amends the 

requirement in current § 701.23(b)(3)(ii) 

that written agreements and schedules 

of loans be retained by the purchaser. 

Current § 701.23(b)(3)(ii) provides that a 

written agreement and a schedule of the 

eligible obligations covered by the 


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95See § 749.2. 

96See appendix A to part 749. 

97See 12 CFR 749.5. 

98 12 CFR part 749, app. A. 

99See generally part 749; and NCUA Legal Op. 

07–0812 (Jan. 2008), available at https://

www.ncua.gov/regulation-supervision/legalopinions/2008/electronic-retention-records. 

100 12 U.S.C. 1757(13). 

101 Id. (emphasis added). 

102Emphasis added. 

agreement are retained in the 

purchaser’s office. Under the final rule, 

the purchasing FCU must still retain the 

written loan purchase agreement and a 

schedule of the eligible obligations 

covered by the agreement but is no 

longer required to retain the documents 

in the purchaser’s office. 

The Board acknowledges the 

requirement for the FCU to retain the 

written loan purchase agreement and 

schedule of the eligible obligations in 

the purchaser’s office could imply that 

the written loan purchase agreement 

and schedule be retained in a hard-copy 

format, which is outdated given the 

current digital environment. An FCU 

might choose to store its records in 

electronic format, in the cloud, or 

housed in off-site servers or databases. 

An FCU must still make the loan 

purchase agreement and schedule of the 

eligible obligations covered by the 

agreement available upon request by the 

NCUA.95 Credit unions that have some 

or all of their records maintained by an 

off-site data processor are considered to 

be in compliance for the storage of those 

records if the service agreement 

specifies the data processor safeguards 

against the simultaneous destruction of 

production and back-up information.96

Accordingly, § 701.23(b)(3)(ii) of the 

final rule provides that a written 

agreement and a schedule of the eligible 

obligations covered by the agreement 

are retained by the purchaser. 

This change will align this 

requirement with the NCUA’s 

regulations and guidelines for FICUs on 

records preservation programs. Under 

part 749, the NCUA does not require or 

recommend a particular format for 

record retention. If the credit union 

stores records on microfilm, microfiche, 

or in an electronic format, the stored 

records must be accurate, reproducible, 

and accessible to an NCUA examiner.97

If records are stored on the credit union 

premises, they should be immediately 

accessible upon the examiner’s request; 

if records are stored by a third party or 

off site, then they should be made 

available to the examiner within a 

reasonable time after the examiner’s 

request.98 The credit union must 

maintain the necessary equipment or 

software to permit an examiner to 

review and reproduce stored records 

upon request. The credit union should 

also ensure that the reproduction is 

acceptable for submission as evidence 

in a legal proceeding.99

Public Comments 

Two commenters specifically offered 

support for aligning the requirements in 

§§ 701.23(b)(3)(ii), (c)(2), and (d)(1)(iii) 

with the electronic record availability 

and preservation standards outlined in 

part 749 of the NCUA’s regulations. 

Discussion 

Given the strong support expressed by 

commenters, and the lack of objections, 

the Board is adopting the changes to 

§ 701.23(b)(3)(ii), (c)(2), and (d)(1)(iii) as 

proposed for the reasons set forth in the 

notice of proposed rulemaking. Note 

also that current § 749.5 provides that, 

where NCUA regulations require credit 

unions to retain certain writings, 

records or information, credit unions 

may use any format that accurately 

reflects the information in the record, is 

accessible to all persons entitled to 

access by statute, regulation or rule of 

law, and is capable of being reproduced 

by transmission, printing, or otherwise. 

Section 749.5 provides further that the 

credit union must maintain the 

necessary equipment or software to 

permit an examiner to access the 

records during the examination process. 

Section 701.23(b)(4) 

The final rule amends current 

§ 701.23(b)(4), which limits the 

aggregate unpaid balance of certain 

eligible obligations purchased by an 

FCU to a maximum of 5 percent of the 

FCU’s unimpaired capital and surplus. 

Under the final rule, the 5-percent 

limitation applies solely to notes of a 

liquidating credit union purchased by 

an FCU from the liquidating credit 

union. As discussed in the following 

paragraphs, the Board has determined 

this change would remove a regulatory 

limit to the purchase of eligible 

obligations that the FCU Act does not 

require. The Board believes adequate 

safety and soundness of eligible 

obligations purchases can be 

accomplished through principles-based 

regulation rather than a one-size-fits-all 

limitation. 

Section 701.23 provides both the 

regulatory authority for purchases of 

eligible obligations by an FCU and the 

limitations. Under the current rule, the 

5-percent limitation applies to eligible 

obligations purchased by an FCU under 

§ 701.23(b)(1) and (b)(2)(ii). In general, 

current paragraph (b)(1) authorizes an 

FCU to purchase (1) eligible obligations 

of its members; (2) eligible obligations of 

a liquidating credit union’s members 

from the liquidating credit union; and 

(3) student loans and real estate-secured 

loans from any source to facilitate the 

purchasing FCU’s packaging of a pool of 

such loans to be sold or pledged on the 

secondary market. Current paragraph 

(b)(2)(ii), which is on purchases from 

FICUs, authorizes an FCU to purchase 

the ‘‘eligible obligations of a liquidating 

credit union without regard to whether 

they are obligations of the liquidating 

credit union’s members.’’ 

The statutory source of the 5-percent 

limitation is section 107(13) of the 

Act.100 Section 107 generally 

enumerates the powers of FCUs, and 

paragraph (13) authorizes an FCU to 

make certain loan purchases. 

Specifically, paragraph (13) provides the 

following authority, verbatim: in 

accordance with rules and regulations 

prescribed by the Board, to purchase, 

sell, pledge, or discount or otherwise 

receive or dispose of, in whole or in 

part, any eligible obligations (as defined 

by the Board) of its members and to 

purchase from any liquidating credit 

union notes made by individual 

members of the liquidating credit union 

at such prices as may be agreed upon by 

the board of directors of the liquidating 

credit union and the board of directors 

of the purchasing credit union, but no 

purchase may be made under authority 

of this paragraph if, upon the making of 

that purchase, the aggregate of the 

unpaid balances of notes purchased 

under authority of this paragraph would 

exceed 5 per centum of the unimpaired 

capital and surplus of the credit 

union.101

Section 107(13) applies to the 

purchase of two mutually exclusive 

categories of loans— ‘‘eligible 

obligations’’ (as that term may be 

defined by the Board) of the purchasing 

FCU’s members and the ‘‘notes’’ of a 

liquidating credit union made to the 

liquidating credit union’s members. The 

5-percent limitation, however, applies 

solely to the second category of loans; 

that is, the notes of a liquidating credit 

union to its members. The statutory 

language specifies that ‘‘no purchase 

may be made . . . if, upon the making 

of that purchase, the aggregate of the 

unpaid balances of notes purchased 

under authority of this paragraph would 

exceed 5 per centum of the unimpaired 

capital and surplus of the credit 

union.’’ 102 The 5-percent limitation is 

specific to the ‘‘aggregate unpaid 


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103Emphasis added. 

104 12 CFR 701.23(a). 

105Under the current definition of eligible 

obligation, there may be instances where the notes 

of the liquidating credit union members are also 

eligible obligations of the members of the 

purchasing FCU. The 5-percent limitation will 

apply to these loans as they fall within the more 

specific category of eligible obligations purchased 

from a liquidating credit union. 

106For example, the preamble to the 1979 final 

rule implementing the NCUA’s eligible obligations 

authority contained the following statement: ‘‘The 

Administration feels that the language of Section 

107(13) is clear, and that the best interpretation is 

that adopted in the proposed rule’’ (that is, the 

currently codified regulatory text). 44 FR 27068, 

27070 (May 9, 1979). 

107Antonin Scalia & Bryan A. Garner, Reading 

Law: The Interpretation of Legal Texts, 148 (2012). 

108 Id. 

109 Id. at 145. 

110 Id. 

111Public Law 90–375 (approved July 5, 1968) 

(Providing authority, in accordance with rules and 

regulations prescribed by the Director, to purchase 

from any liquidating credit union notes made by 

individual members of the liquidating credit union 

at such prices as may be agreed upon by the board 

of directors of the liquidating credit union and the 

board of directors of the purchasing credit union, 

but no purchase may be made under authority of 

this paragraph if, upon the making of that 

purchase, the aggregate of the unpaid balances of 

notes purchased under authority of this paragraph 

would exceed 5 per centum of the unimpaired 

capital and surplus of the credit union. (emphasis 

added)). 

112S. Rep. No. 1265, 90th Cong., 2d Sess., at 2 

(June 18, 1968). 

113Statement of J. Deane Gannon, Director, 

Bureau of Federal Credit Unions, Social Security 

Administration, Department of Health, Education 

and Welfare, FCU Act Amendments, Subcommittee 

on Financial Institutions of the Comm. on Banking 

and Currency, at 11–12 (May 24, 1968). 

balances of notes’’ 103 purchased ‘‘under 

authority of this paragraph’’ (that is, 

paragraph (13) of section 107). As 

italicized in the preceding quotes, the 

only notes authorized to be purchased 

pursuant to section 107(13) are those of 

a liquidating credit union to its 

members. Notwithstanding the 

ambiguity introduced by the reference 

to the entire ‘‘paragraph’’ (13) in the 

context of the 5-percent limitation, the 

following term ‘‘notes’’ narrows the 

required scope of its application to 

purchases from a liquidating credit 

union. 

Despite the statutory wording, current 

§ 701.23 does not distinguish between 

eligible obligations and notes. Section 

107(13) of the FCU Act empowers the 

NCUA to define the term ‘‘eligible 

obligation.’’ The NCUA has exercised 

this discretion by opting to jointly treat 

notes and other eligible obligations as 

the same type of instrument under its 

regulations. Both are encompassed in 

the regulatory definition of the term 

‘‘eligible obligation,’’ which is defined 

to be ‘‘a loan or group of loans.’’ 104

Under the final rule, the 5-percent 

limitation applies solely to an FCU’s 

purchase of the notes of a liquidating 

credit union. The limitation will not 

apply to other loans purchased by an 

FCU under the authority of section 

107(13). 

The final rule also amends the 

definition of eligible obligations to 

reflect the revised scope of the 5-percent 

limitation. As discussed previously, the 

final rule revises the definition of 

eligible obligation to mean ‘‘a whole 

loan or part of a loan (other than a note 

held by a liquidating credit union) that 

does not meet the definition of a loan 

participation under § 701.22(a).’’ 105

The Board acknowledges that the 

current scope of the 5-percent limitation 

reflects or implies an alternate legal 

reading of the statutory language, which 

the Board recognizes as a plausible 

reading. The alternate reading hinges on 

the language providing that ‘‘no 

purchase may be made under authority 

of this paragraph.’’ The term ‘‘this 

paragraph’’ encompasses paragraph (13) 

of section 107 in its entirety. This 

reading applies the 5-percent limitation 

to all instruments (eligible obligations 

and notes) purchased pursuant to 

paragraph (13). The current regulation 

reflects such an interpretation, and the 

Board has made past statements in 

support of this reading.106 This 

rulemaking constitutes a 

reconsideration of the NCUA’s prior 

position. As noted, the NCUA has 

determined that the regulatory change 

made by this final rule is more 

consistent with the language of the FCU 

Act and is more aligned with the 

different safety and soundness 

considerations with respect to eligible 

obligations in general and notes 

purchased from a liquidating credit 

union. 

This new reading is better supported 

by accepted canons of statutory 

construction. The statutory construction 

canon of ‘‘consistent usage’’ logically 

presumes that different words denote 

different ideas.107 Accordingly, the use 

of the terms ‘‘eligible obligations’’ and 

‘‘notes’’ is intended to distinguish 

between two mutually exclusive 

categories of loans. Further, the canon 

holds that ‘‘a word or phrase is 

presumed to bear the same meaning 

throughout a text.’’ 108 The use of the 

word ‘‘notes’’ in paragraph 107(13) is 

appropriately interpreted consistently 

and exclusively to reference only notes 

made by a liquidating credit union to its 

members. 

This reading also aligns with the 

‘‘surplusage’’ canon of statutory 

interpretation. Under this canon, ‘‘every 

word and every provision is to be given 

effect if possible.’’ 109 ‘‘No word should 

be ignored. None should needlessly be 

given an interpretation that causes it to 

duplicate another provision or have no 

consequence.’’ 110 This interpretation 

accounts for language subsequent to 

‘‘under authority of this paragraph’’ that 

modifies the clause’s scope. This 

subsequent language specifies that the 

prohibition applies only ‘‘if, upon the 

making of that purchase, the aggregate 

of the unpaid balances of notes 

purchased under authority of this 

paragraph would exceed 5 per centum 

of the unimpaired capital and surplus of 

the credit union.’’ Thus, the limit’s 

application is required only with 

respect to the purchase of ‘‘notes,’’ 

which, as stated previously, is 

appropriately narrowed to solely cover 

loans made by liquidating credit unions 

to their members. Reading the statute to 

require application of the 5-percent 

limitation to ‘‘eligible obligations’’ 

conflates the terms ‘‘notes’’ and 

‘‘eligible obligations,’’ despite the 

different terminology Congress enacted. 

The effect of treating the terms as 

duplicative is to effectively ignore the 

use of the term ‘‘notes,’’ which should 

be separately considered under the 

surplusage canon. 

It also bears noting that the stated 

rationale for original enactment of the 5- 

percent limitation does not apply to the 

purchase of eligible obligations. The 5- 

percent limitation language in section 

107(13) of the Act was added by 

Congress in 1968 and referred solely to 

notes of liquidating credit unions at that 

time because that statute did not refer to 

purchases of eligible obligations.111

That language is identical to the current 

version of the statutory text and 

continues to refer solely to ‘‘notes’’ of 

liquidating credit unions. Prior to the 

amendment, FCUs lacked express 

statutory authority to purchase the loans 

of liquidating credit unions. As a result, 

liquidating credit unions were 

hampered in their efforts to dispose of 

their assets to repay their members. The 

Senate report accompanying the 

legislation explained that the change 

would ‘‘greatly increase the market for 

the notes of liquidating credit unions 

and will prevent liquidating credit 

unions from having to go outside the 

credit union movement to liquidate 

their assets.’’ 112 However, Congress was 

also mindful of the risks that might be 

posed in purchasing the loans of credit 

unions compelled to liquidate due to 

poor management decisions.113 As a 

result, it opted to limit the ability of an 

FCU to purchase notes of liquidating 


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114H.R. Rep. No. 1372 (May 9, 1968). 

115Public Law 95–22 (approved Apr. 19, 1977). 

116H.R. Rep. No. 95–23, at 16 (Feb. 22, 1977). 

117See, for example, 123 Cong. Rec. H 1521–32, 

at H–1524 (Daily ed. March 1, 1977) (Describing the 

amendment as providing for the ‘‘Purchase and sale 

of notes of members.’’); H.R. Rep. No. 95–23, at 16 

(Feb. 22, 1977) (also describing amendment as 

pertaining to the ‘‘Purchase and sale of notes’’); and 

Statement of C. Austin Montgomery, Administrator, 

National Credit Union Administration Before the 

Subcommittee on Financial Institutions 

Supervision, Regulation and Insurance Committee 

on Banking, Finance, and Urban Affairs, House of 

Representatives, 95th Cong. 27 (1977) (‘‘Temporary 

liquidity problems experienced by credit unions 

might be resolved by selling or pledging notes’’). 

118Scalia & Garner, supra note 7 at 64 (‘‘[T]he 

purpose must be derived from the text, not from 

extrinsic sources such as legislative history or an 

assumption about the legal drafter’s desires’’). 

credit unions to 5 percent of its 

unimpaired capital and surplus.114

The express authority to purchase 

eligible obligations was later added to 

the text of section 107(13) in 1977.115

The legislative history from that time 

shows the amendment was intended to 

provide FCUs with flexibility to use 

secondary market facilities to enhance 

liquidity, especially in relation to real 

estate loans.116 The purchase by an FCU 

of loans made to its own members is not 

analogous to, and does not pose the 

same inherent risk that, purchasing the 

notes of a liquidating credit union does. 

Accordingly, it is reasonable that 

Congress would elect not to mandate a 

limit on the ability of an FCU to make 

such purchases. This supposition is 

supported by Congress’ decision to use 

the new term ‘‘eligible obligations’’ (and 

in granting the NCUA broad authority to 

define this term), rather than simply 

revising the existing scope of the term 

‘‘notes’’ to include member loans. 

Further, the legislative history 

accompanying enactment of the 1977 

amendments does not make any 

mention of the 5-percent limitation 

being applicable to eligible obligations. 

The 1977 legislative history in several 

instances also refers to the amendment 

granting FCUs the ability to purchase 

the ‘‘notes’’ of its members. One could 

infer from this that the term ‘‘eligible 

obligations’’ was intended to be read 

synonymously with ‘‘notes.’’ 117 This 

reading appears at least plausible 

because the broad category of ‘‘notes’’ 

could be seen to encompass various 

debt instruments, including notes or 

written documents evidencing a 

member’s eligible obligations. Such a 

reading, however, is not required and is 

inferior to the interpretation the Board 

is proposing in this rule for two reasons. 

First, Congress ultimately opted to use 

the term ‘‘eligible obligations’’ in the 

statutory amendment that was enacted. 

The codified text supersedes nonbinding statements in the legislative 

record.118 Second, and as discussed 

earlier, accepted canons of statutory 

construction favor an interpretation that 

provides individual terms with their 

own individual meaning. 

For the preceding reasons, the NCUA 

has determined that the regulatory 

change made by this final rule is more 

consistent with the language of the FCU 

Act. The NCUA also has determined 

that the amendment will not pose a 

safety and soundness risk due to the 

addition of principles-based risk 

management requirements. By 

amending the current rule to narrow the 

application of the 5-percent limitation 

to the aggregate of the unpaid balances 

of loans purchased from any source to 

instead apply to only the ‘‘notes’’ of a 

liquidating credit union, the Board 

intends to allow FCUs greater capacity, 

flexibility, and individual autonomy to 

establish their own risk tolerance limits 

for the amount of the loans of its 

members that can be purchased from 

any source other than a liquidating 

credit union. This includes other 

financial institutions, fintech 

companies, third-party loan acquisition 

channels such as CUSOs, and other 

loan-originating retailers. 

While the narrower interpretation of 

section 107(13) of the Act will remove 

the existing limit on the amount of 

eligible obligations that an FCU could 

purchase, establishing risk management 

expectations will reduce potential risk 

to the Share Insurance Fund while 

allowing FCUs more flexibility in how 

they manage their eligible obligation 

purchase activities. New § 701.23(b)(6), 

which is discussed in detail later in the 

part of the preamble on paragraph (b)(6), 

would outline minimum risk 

management standards that must be 

included in the written loan purchase 

policy for any FCU that plans to 

purchase eligible obligations. The Board 

believes these risk management 

standards should be part of the normal 

business practices at well-run FCUs that 

engage in the purchase of eligible 

obligations and, as such, should not 

represent an additional burden. It is the 

Board’s view that the proposed changes 

would allow well-run FCUs more 

autonomy and flexibility in how they 

conduct their business. Provided the 

FCU can demonstrate and document 

that its loan purchase activity does not 

present a material risk to the viability or 

solvency of the FCU through the 

standards established in § 701.23(b)(6), 

the FCU should be able to establish its 

own internal standards to meet its 

business needs and the needs of its 

members. 

The final rule amends current 

§ 701.23(b)(4) to remove the exclusions 

provided in paragraphs (b)(4)(i) through 

(iv) and revises the current language to 

apply the 5-percent limit only to notes 

purchased from liquidating credit 

unions. While the narrower 

interpretation of section 107(13) of the 

FCU Act will remove the existing 

restriction on the amount of eligible 

obligations an FCU could purchase, the 

new risk management requirements will 

minimize the potential increase in risk 

to the Share Insurance Fund, while 

allowing FCUs more flexibility in how 

they manage their loan purchase 

activities. Accordingly, § 701.23(b)(4) is 

revised to provide that the aggregate of 

the unpaid balance of notes purchased 

under paragraphs (b)(1)(ii) and (b)(2)(ii) 

of § 701.23 shall not exceed 5 percent of 

the unimpaired capital and surplus of 

the purchaser. 

The Board invited comments 

concerning the proposed narrowing the 

application of the 5-percent limitation 

to only apply to the aggregate amount of 

‘‘notes’’ that can be purchased by an 

FCU from a liquidating credit union. 

Public Comments 

Twenty-seven commenters 

specifically offered support for 

narrowing the 5-percent limitation to 

cover only notes of liquidating credit 

unions for the reasons provided in the 

proposal. Three commenters suggested 

the proposed change will allow credit 

unions, possibly through CUSOs and 

other collaborations, to build strong 

relationships with fintech companies, 

giving FICUs more tools to allow them 

to be a part of the lending system as it 

has evolved with the use of technology. 

Discussion 

Given the strong support expressed by 

commenters, and the lack of objections, 

the Board is adopting the changes to 

§ 701.23(b)(4) as proposed for the 

reasons discussed earlier and in the 

notice of proposed rulemaking. 

Section 701.23(b)(5) Grandfathered 

Purchases 

The final rule amends current 

§ 701.23(b)(5) to broaden the 

grandfathering provision in paragraph 

(b)(5). Current § 701.23(b)(5) provides 

that, subject to safety and soundness 

considerations, an FCU 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. 

The Board believes the revisions made 

by this final rule will avoid placing 

undue burden on FCUs that were 

operating in compliance with the 


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119A credit union’s written loan purchase 

policies may be incorporated into the written 

lending policies required under § 741.3(b)(2). 

120See §§ 701.4(b)(4), 701.21(c)(2), and 

741.3(b)(2). 

existing rule and avoid disrupting the 

existing eligible obligations market by 

forcing widespread divestments of the 

eligible obligations currently held in 

FCU loan portfolios. While the 

grandfathering provision will allow 

FCUs to continue to hold eligible 

obligations that were purchased prior to 

the effective date of this rule, it does not 

exempt FCUs from conducting and 

updating risk assessments, establishing 

concentration limits, or monitoring the 

ongoing condition of an FCU’s eligible 

obligation loan portfolio. 

Accordingly, the final rule amends 

§ 701.23(b)(5) to provide that, subject to 

safety and soundness considerations, an 

FCU may hold any of the loans 

described in paragraph (b) of this 

section that were acquired before the 

effective date of the final rule approved 

by the Board; provided the transaction 

complied with § 701.23 at the time the 

transaction was executed. 

Public Comments 

One commenter specifically offered 

support for the proposed revisions to 

§ 701.23(b)(5). The commenter stated 

that FCUs that have operated in 

compliance with the recently expired 

§ 701.23(i) and the NCUA’s other 

regulatory requirements should not be 

forced to divest from their prudently 

purchased eligible obligations. 

Discussion 

Given the support expressed above, 

and the lack of objections, the Board is 

adopting the changes to § 701.23(b)(5) as 

proposed for the reasons set forth in the 

notice of proposed rulemaking. 

New § 701.23(b)(6) 

The final rule adds new paragraph 

(b)(6) to § 701.23, which sets forth basic 

due diligence, risk assessment, and risk 

management requirements that must be 

addressed in an FCU’s internal written 

purchase policies.119 An FCU’s board of 

directors is responsible for planning, 

directing, and controlling the FCU’s 

activities. To fulfill these duties, the 

board of directors must establish 

adequate policies to ensure the credit 

union operates safely and soundly and 

in compliance with applicable laws and 

regulations. The introductory paragraph 

to new § 701.23(b)(6) provides that the 

purchases of eligible obligations and 

notes of liquidating credit unions must 

comply with the purchasing FCU’s 

internal written purchase policies, 

which must contain certain provisions. 

The specific policy requirements, 

which are discussed in detail below, are 

part of the basic fiduciary 

responsibilities and duties required of 

boards of directors.120 The requirements 

in the final rule address the basic 

elements necessary to administer a safe 

and sound loan purchase program. 

As discussed previously, the Board is 

adding new requirements under 

§ 701.23(b)(6) to mitigate the risk of 

removing certain regulatory limits on 

the purchase of loans by FCUs. The 

requirements are crafted to promote safe 

and sound loan purchase programs, 

which are intended to protect credit 

unions and the Share Insurance Fund. 

These requirements continue the 

Board’s long-standing expectations for 

FCUs that purchase loans to 

appropriately identify and mitigate 

undue risk, while also providing FCUs 

greater flexibility to establish their own 

risk tolerance limits. These 

requirements are intended to mitigate 

unintended consequences related to the 

removal of the prescriptive 

requirements in current § 701.23(b)(2). 

The prescriptive requirements in 

current paragraph (b)(2), in some cases, 

resulted in FCUs managing their lending 

practices and balance sheets to 

regulatory restrictions instead of broader 

considerations for safe and sound 

lending practices. 

The new requirements added by this 

final rule provide credit unions with 

expanded flexibility to develop loan 

purchase policies that are 

commensurate with the size, scope, 

type, complexity, and level of risk posed 

by the planned loan purchase activities. 

The new requirements are intended to 

provide principles-based requirements 

that are useful for credit unions of any 

size or complexity to implement the 

appropriate level of due diligence, risk 

assessment, and management. 

When determining whether to start a 

loan purchase program and developing 

related written policies, credit unions 

should consider whether the loan 

purchase activities being contemplated 

are consistent with the FCU’s overall 

business strategy and risk tolerances 

and financial and operational 

capabilities. Loan purchase, sale, or 

pledge activities that are inconsistent 

with the FCU’s risk tolerance levels, 

represent undue risk in relation to the 

credit union’s financial capacity, or 

beyond management’s ability to manage 

can pose material risks to an FCU’s 

financial or operational condition. 

The risk management expectations 

outlined in this final rule reflect key 

components of long-standing 

supervisory expectations as 

communicated to credit unions through 

NCUA Letters to Credit Unions (LCU), 

Supervisory Letters, and the Examiner’s 

Guide. 

The Board requested comment on the 

following: (1) The new written purchase 

policy requirements in paragraph (b)(6) 

of the rule; (2) the principles-based due 

diligence, risk assessment, and risk 

management requirements and whether 

they are sufficient to offset the risk 

associated with removing the CAMELS 

rating and ‘‘well capitalized’’ 

requirements for a credit union to 

purchase and hold eligible obligations 

from a FICU; and (3) whether there are 

other principles-based safety and 

soundness or compliance criteria the 

Board should consider that would 

mitigate the risk of removing certain 

prescriptive requirements from the rule. 

Public Comments 

Several commenters offered general 

support for the proposed due diligence 

requirements. One commenter suggested 

that most, if not all, of these 

requirements are already done as a 

matter of course. Another commenter 

believed the proposed requirements will 

help limit prudential risks associated 

with FCUs’ investments in eligible 

obligations in a safe and sound manner. 

In response to a question in the 

proposed rule preamble for commenters, 

one commenter stated that additional 

safety and soundness criteria (beyond 

those included in the proposed rule) 

would not be helpful or mitigate risk 

further. The commenter recommended, 

however, that the limits imposed under 

§ 701.23 should be comparable to those 

imposed on loan participation 

transactions; for example, instituting a 

limit in line with the loan participation 

limit of an amount of net worth to one 

seller. The commenter suggested that 

this change would simplify any 

confusion for both buyers and sellers of 

eligible obligations and allow examiners 

to compare to a benchmark when 

reviewing credit unions who purchase 

eligible obligations. One commenter 

recommended that each safety and 

soundness standard adopted in the final 

rule be sufficiently flexible to permit 

credit unions to adopt internal written 

purchase policy provisions that are 

commensurate with the size, scope, 

type, complexity, and level of risk posed 

by their individual eligible obligation 

activities. 

Several commenters provided 

thoughts and recommendations 

regarding specific proposed due 

diligence requirements. One commenter 

suggested that requiring written 

purchase policies and established 

portfolio concentration limits seems 


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121Available at https://ncua.gov/regulationsupervision/letters-credit-unions-other-guidance. 

prudent and valuable to ensure 

appropriate consideration by credit 

unions engaging in eligible obligation 

activity. 

One commenter suggested that 

requiring a legal review of agreements 

seems unnecessary, as most credit 

unions already use legal counsel for the 

drafting or review of agreements, and 

those that do not perhaps have adequate 

internal expertise or expect to engage in 

a certain activity in such a modest way 

that it poses no material risk. The 

commenter suggested further that the 

requirement for legal review seems 

overly intrusive to a credit union’s 

responsibility to understand and 

manage its risks. Another commenter 

recommended the NCUA further clarify 

the differences in what is required in 

the legal agreements for loan 

participations and eligible obligation 

purchases. The commenter noted that 

some of the requirements in the 

respective provisions (§ 701.22(d) for 

loan participation agreements and 

proposed new § 701.23(b)(6)(iv) for 

eligible obligation agreements) are 

similar and yet worded differently. The 

commenter provided as an example that 

the requirements in §§ 701.22(d)(4)(i) 

and 701.23(b)(6)(iv)(A) to identify the 

specific loans being purchased, and the 

requirement in the loan participation 

rule at § 701.22(d)(1) that the agreement 

be properly executed under applicable 

law, do not appear at all in the proposed 

eligible obligation rule’s new language, 

although proposed § 701.23 does require 

a legal review of the eligible obligations 

purchase. To address these types of 

differences, the commenter 

recommended the following additions: 

(1) clarifying which of the loan 

participation agreement requirements 

also apply to eligible obligations 

(depending on whether servicing is 

retained or released) and (2) specifying 

whether there are additional (or fewer) 

obligations that apply to loan 

participations versus eligible 

obligations, including specifically what 

those differences are. To effectuate this 

change, the commenter recommended 

adding language to § 701.23(b)(6)(iv) as 

follows: 

Require that the written purchase 

agreement include, in the case of a 

servicing released transaction: 

The following requirements 

referenced in the loan participation rule 

(§ 701.22): [ll]. 

The following additional 

requirements not referenced in the loan 

participation rule (§ 701.22): [ll]. 

Require that the written purchase 

agreement include, in the case of a 

servicing retained transaction: 

The following requirements 

referenced in the loan participation rule 

(§ 701.22): [ll]. 

The following additional 

requirements not referenced in the loan 

participation rule (§ 701.22): [ll]. 

One commenter suggested that 

partnering with responsible third parties 

is often what is most suitable for the 

credit union and their members. The 

commenter encouraged the NCUA to 

refresh its view on conflicts-of-interest 

and shift to something more like ‘‘credit 

unions relying on third party 

underwriting performed by the seller or 

an agent of the seller could be operating 

in an unsafe and unsound manner and 

should establish and demonstrate clear 

risk management and oversight 

protocols.’’ 

Discussion 

In recognition of the general support 

from commenters for this proposed 

change, the Board is adopting the 

revisions as proposed for the reasons set 

forth in the notice of proposed 

rulemaking. The Board does not believe 

that performing a legal review of the 

written purchase or sales agreements is 

burdensome because, as noted by one 

commenter, most credit unions already 

carry out such reviews. Additionally, 

while legal reviews may need to be 

conducted to ensure that the legal and 

business interests of the credit union are 

protected against undue risk, the final 

rule does not specify when legal reviews 

are required, only that the credit union’s 

internal written purchase policies must 

address when a legal review of 

agreements or contracts will be 

performed to ensure that the legal and 

business interests of the credit union are 

protected against undue risk. This 

requirement should be based on the 

results of the due diligence and risk 

assessment processes completed for the 

planned activity. The determination as 

to when such a legal review would be 

required should be commensurate with 

the size, scope, type, complexity, and 

level of risk posed by the planned 

activity covered by the written 

agreement and contract. 

When it is decided that a legal review 

by counsel is required, the credit 

union’s attorneys should review the 

written agreement or contract to ensure 

that its legal and business interests are 

protected. The review should include 

the terms, recourse and risk-sharing 

arrangements, loan administration and 

controls. The credit union’s attorneys 

should also make sure the board of 

directors and management clearly 

understand the rights and 

responsibilities of each party. For 

example, the review should indicate 

which party bears the costs of collateral 

disposition, and whether there are 

recourse arrangements, or a 

commitment for the purchasing credit 

union to make additional loan 

purchases and describe the interest 

being purchased. The legal review 

should also ensure that the 

requirements for a written loan 

purchase agreement under section 

§ 701.23 are adequately addressed and 

that the agreement complies with all 

state and federal laws. The legal review 

should address loan and collateral 

documentation and information that the 

seller is required to share with the 

purchasing credit union, status reports 

on payments and interest accrual, exit 

strategies or termination clauses, 

procedures for modifying loan terms, 

notification of adverse loan events, 

collection procedures if servicing rights 

are retained by the seller, turnover in 

key staff of the seller or servicer, and 

other provisions necessary to effectively 

manage credit risk. 

The credit union’s board of directors 

and senior management should exercise 

their right to negotiate the terms of any 

agreements or contracts to make them 

mutually fair and equitable. Further, a 

credit union should understand what 

actions it may take if the contract is 

breached, or the seller, any subservicers, or sub-contractors are not 

performing as expected. The written 

loan purchase agreement is a critical 

component of any third-party 

transaction or relationship, and thus, a 

legal review is a key element in the 

overall risk mitigation and management 

process. 

New § 701.23(b)(6)(i) 

New § 701.23(b)(6)(i) requires FCUs to 

perform due diligence on the seller, and 

any applicable counterparties, before 

purchasing an eligible obligation. 

Conducting due diligence on third 

parties is a long-standing expectation for 

credit unions engaging in third-party 

relationships and when introducing 

new loan programs and products, as 

noted in NCUA LCU 01–CU–20 

(November 2001), NCUA LCU 08–CU– 

26 (November 2008), and NCUA LCU 

10–CU–03 (March 2010).121

On several occasions, third-party 

relationships with credit unions have 

resulted in financial stress due to 

unexpected costs, legal disputes, and 

asset losses. Due diligence reviews are 

important because they assist credit 

unions in risk identification and 

mitigation when engaging with outside 

parties in a new loan program and when 


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122Available at https://ncua.gov/regulationsupervision/letters-credit-unions-other-guidance. 

enhancing services to members. Failure 

to complete adequate due diligence can 

result in the acquisition of loan volumes 

that exceed the board’s risk appetite or 

credit union’s financial capacity, loan 

types that go beyond management’s 

ability to manage, or loan types or 

volume that exceed the capabilities of 

current loan processing and 

management information systems. The 

use of third parties can add complexity 

and additional risk to a credit union’s 

activities and may also expose the credit 

union to consumer compliance and 

other legal risks. For example, failure to 

conduct adequate due diligence could 

lead to an FCU entering into agreements 

with a third party that does not have the 

ability to fulfill its contractual 

obligations. This could lead to 

disruptions in member service, 

uncollected payments on loans, and 

potential losses if the third party fails to 

remit funds that are due to the 

purchasing FCU. 

The responsibility to perform 

appropriate due diligence remains with 

the FCU’s board of directors and 

management and cannot be outsourced. 

Overreliance on the due diligence 

information provided by a third party 

without independent review by the 

FCU’s board and management could 

result in unsafe and unsound practices. 

The final rule allows FCUs the 

flexibility to determine the level and 

depth of due diligence reviews that are 

necessary based on the level of risk 

posed by the loans being purchased and 

the third-party relationships. Several 

factors may be considered when 

determining the appropriate nature of 

due diligence for third-party loan 

purchases and programs, including the 

following: 

• the transaction’s complexity; 

• the purchasing FCU’s internal 

lending policies and procedures; 

• the transaction’s size relative to the 

FCU’s existing loan portfolio, 

concentrations, and net worth level; and 

• the purchasing FCU’s management 

and staff expertise regarding the types of 

loans being purchased. 

Additionally, FCUs can take a tiered 

approach when establishing their due 

diligence processes in their loan 

purchase policies. For example, when 

conducting background checks the FCU 

can determine how best to assess a third 

party’s business reputation, potential 

conflicts of interest, experience, and 

compliance with federal and state laws, 

rules, and regulations based on the type 

of relationship with the third party and 

its risk exposure. 

Accordingly, new § 701.23(b)(6)(i) 

provides that the purchasing FCU’s 

written purchase policy must require 

that the purchasing FCU conduct due 

diligence on the seller of the loans and 

other counterparties to the transaction 

prior to the purchase. 

New § 701.23(b)(6)(ii) 

New § 701.23(b)(6)(ii) requires FCUs 

to establish risk assessment and risk 

management processes for purchase 

activities. Conducting risk assessments 

and implementing risk management 

processes reflect the NCUA’s longstanding expectation that credit unions 

incorporate these activities in 

relationships with third parties as 

outlined in NCUA LCU 07–CU–13 

(April 2008), Evaluating Third-Party 

Relationships; NCUA LCU 22–CU–05 

(March 2022), CAMELS Rating System; 

and NCUA Letter to FCUs 02–FCU–09 

(March 2002), Risk-Focused 

Examination Program.122 The purchase 

of loans can provide an FCU with a 

wide range of benefits, including 

achieving strategic loan growth, 

managing liquidity, adjusting risk 

exposures, and enhancing the services 

provided to members. However, an FCU 

that starts a new lending program, 

including the purchase or sale of loans, 

or engages with third parties without 

fully understanding the associated risks, 

may expose itself to credit, interest rate, 

liquidity, transaction, compliance, 

strategic, or reputation risk. Risk 

assessments allow credit unions to 

better understand the risk involved in 

new products and services to ensure the 

board has effective processes in place to 

control the risk. Not understanding 

these associated risks may result in the 

FCU operating outside of the board’s 

risk appetite and can result in elevated 

risk to the Share Insurance Fund. FCUs 

are ultimately responsible for 

safeguarding member assets and 

ensuring sound operations. 

Adequate risk management processes 

include ongoing monitoring and 

oversight of the loan purchase program. 

This includes formal reporting to the 

board of directors and the FCU’s senior 

management, which will ensure the 

board is able to fulfill its duties. An 

FCU’s management reporting should be 

timely and commensurate with the size, 

complexity, and risk exposure of the 

FCU. For example, the board of 

directors should be informed when 

targets are met or exceeded, or limits 

breached. Reports should also consist of 

appropriate information that the board 

of directors and management could use 

to make informed decisions and take 

timely corrective action when 

warranted. For effective governance, an 

FCU’s board of directors and senior 

management must understand the 

nature and level of risk associated with 

the FCU’s purchased loan portfolio and 

program and receive periodic updates 

and reports on its performance. 

The final rule provides FCUs the 

flexibility to tailor their risk assessment 

and management processes to fit within 

their governance framework and other 

operations, while providing a basic 

framework to follow when developing 

their initial and ongoing risk assessment 

and management processes. 

Accordingly, new § 701.23(b)(6)(ii) 

provides that the purchasing FCU’s 

internal written purchase policies must 

establish risk assessment and risk 

management process requirements that 

are commensurate with the size, scope, 

type, complexity, and level of risk posed 

by the planned loan purchase activities. 

New § 701.23(b)(6)(iii) 

New § 701.23(b)(6)(iii) requires FCUs 

to establish certain internal 

underwriting and ongoing monitoring 

standards for eligible obligation 

purchase activities. Underwriting is the 

foundation of lending. Without ensuring 

that underwriting standards are in place 

that adequately address how to analyze 

a borrower’s ability to repay their debt, 

the board will not be able to fulfill its 

responsibilities for the safety and 

soundness of the FCU’s lending 

activities. By this same logic, the board 

must also monitor the level of credit risk 

within the credit union’s loan portfolio. 

Changing economic conditions at the 

local, regional, or national level can 

materially impact the likelihood that the 

credit union’s outstanding loans are 

repaid. For example, the closure of a 

local business that is a large employer 

of the credit union’s members could 

significantly change the risk profile of 

the credit union’s loan portfolio. 

Changing levels of credit risk within the 

FCU’s existing loan portfolio (including 

eligible obligations) may necessitate 

strategic changes or mitigating actions. 

If the level of credit risk begins to 

exceed the board’s risk appetite, then 

risk exposures may need to be adjusted. 

Depending on the circumstances, this 

could include, but is not limited to, 

restricting the purchase of new eligible 

obligations, implementing more 

conservative underwriting standards, or 

potentially divesting parts of the 

existing loan portfolio. 

The FCU’s internal policies must 

address the level of underwriting to be 

performed for the purchase of loans. 

Underwriting should identify all risks 

that could materially influence the 

purchasing FCU’s decision to proceed 

with a loan purchase. Appropriate 


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underwriting standards that adequately 

address how to analyze a borrower’s 

ability to repay their loan and the 

support provided by collateral are a 

basic tenet of lending and help ensure 

that the FCU will be repaid, which 

protects its members and the Share 

Insurance Fund. Without appropriate 

underwriting standards, an FCU will not 

be able to accurately assess its risk of 

credit loss. Originating or purchasing 

loans to high credit risk borrowers 

without appropriately understanding 

and planning for that risk can result in 

unexpectedly high loss rates that 

negatively impact earnings and net 

worth, which may impair the viability 

of the credit union and pose a risk to the 

Share Insurance Fund. A lack of 

adequate underwriting standards can 

also result in adverse risk selection, 

whereby high credit risk borrowers are 

only able to obtain loans from 

institutions with lax underwriting, 

resulting in the FCU attracting 

borrowers with a much higher risk of 

default. 

An FCU engaging in loan purchases 

should conduct an independent credit 

analysis and assessment of the 

borrower’s creditworthiness and abilityto-repay, the support provided by 

collateral if relied on as part of the 

credit decision, and changes to the risk 

profile of the purchased loans. A 

purchasing FCU should not rely on the 

underwriting and analysis performed by 

the seller, or work performed by other 

third-party underwriters on behalf of a 

seller. To do so is an unsafe and 

unsound practice. 

An FCU can leverage its current 

internal underwriting policies for 

similar loan types when developing its 

loan purchase policies. Performing 

credit and collateral analysis as if it 

were the originator should result in 

purchased loans that are consistent with 

the board of director’s overall business 

strategy, risk tolerances, and credit 

quality standards. To the extent a 

purchasing FCU relies on a third party’s 

credit models for credit decisions, the 

purchasing FCU should perform due 

diligence on the credit model. An FCU 

is not prohibited from relying on a 

qualified and independent third party to 

perform model validation. However, the 

purchasing FCU should review the 

model validation to determine if it is 

sufficient. 

The purchasing FCU’s internal loan 

purchase policies should outline and 

identify the loan types that are 

acceptable for purchase. For example, 

acceptable loan types could include 

residential real estate (one-to-four 

family or multi-family first lien and/or 

junior lien), solar loans, automobile 

loans, student loans, unsecured loans, 

out-of-territory loans, commercial loans, 

or government guaranteed loans 

(guaranteed and/or unguaranteed 

portion). 

The loan purchase policy should 

address the level and depth of the 

underwriting and analysis that is 

required for loan purchase activities 

based on the specific loan category, 

type, size, complexity, and risk profile 

of the borrower. The proposed rule 

allows flexibility to establish those 

parameters, while providing a basic 

framework for FCUs to follow when 

developing their policies. 

Accordingly, new § 701.23(b)(6)(iii) 

provides that the purchasing FCU’s 

internal written purchase policies must 

establish underwriting and ongoing 

monitoring standards that are 

commensurate with the size, scope, 

type, complexity, and level of risk posed 

by the loan purchase activities. 

Amended paragraph (b)(6)(iii) would 

provide further that underwriting and 

ongoing monitoring standards must 

address the borrower’s creditworthiness 

and ability to repay, and the support 

provided by collateral if the collateral 

was used as part of the credit decision. 

New § 701.23(b)(6)(iv) 

New § 701.23(b)(6)(iv) provides that 

the purchasing FCU’s internal written 

purchase policy must require that the 

written purchase agreements include 

certain language. A well-written loan 

purchase agreement can minimize 

conflicts between the FCU and other 

parties to the agreement. The Board 

believes that any written loan purchase 

agreement must clearly delineate the 

roles, duties, and obligations of the 

seller, the purchasing FCU, servicer, and 

any other parties associated with the 

agreement, as applicable. The final rule 

establishes minimum provisions that 

any well-written loan purchase 

agreement must address. 

The written loan purchase agreement 

is a critical component of any thirdparty relationship. In addition to 

establishing the rights and obligations of 

each party to the loan agreement, it 

should clearly address how the 

relationship operates. The written loan 

purchase agreement should fully 

describe the roles and responsibilities of 

all parties to the agreement, including 

any subcontractors. A well-written loan 

purchase agreement should address 

dispute resolution, requirements for any 

ongoing credit information if necessary 

for the loan type, remedies upon loan 

default and bankruptcy, which party 

bears the costs of collateral disposition, 

whether there are recourse arrangements 

for early pay-off, and if there is an 

obligation for the purchasing FCU to 

make any additional purchases or credit 

advances. 

The purchasing FCU’s board of 

directors and senior management 

should understand that they may have 

limited control over credit decisions for 

loans purchased in part, including, for 

example, limitations on the ability of 

the purchasing FCU to participate in 

loan modifications, act on defaulted 

loans, or decline to make additional 

advances if the purchasing FCU deems 

such advances are not prudent in 

relation to the loan quality. The written 

loan agreement must address these 

circumstances, and other conditions 

under which the parties to the 

agreement may replace the servicer if 

services are not performed in 

accordance with the terms of the written 

loan purchase agreement. The 

purchasing FCU must also know the 

location and custodian for the original 

loan documents if the original loan 

documents are not required to be 

transferred to the purchasing FCU as 

part of the loan purchase transaction. 

The purchasing FCU could be required 

to provide the original loan documents 

to various parties involved in the 

administration and collection of the 

purchased loans. Therefore, the 

purchasing FCU needs to know where 

the original documents are located and 

whom to contact if the FCU needs to 

obtain the documents. 

The written loan purchase agreement 

must, prior to the loan purchase 

transaction, identify the specific loan or 

loans purchased, and the interest 

purchased. A loan purchase transaction 

may involve a single or multiple loans, 

purchased in whole or in part. The 

documentation, for example, can be as 

simple as an addendum or schedule 

identifying each loan, provided the 

addendum or schedule is incorporated 

by reference into the loan purchase 

agreement. This provision clarifies in 

the existing rule that the loan purchase 

transaction involves the purchase of an 

individual loan or loans, and it is not 

the purchase of an investment interest 

in a pool of loans. FICUs should also 

keep in mind the requirements under 

GAAP for participation interests, which 

were discussed earlier in the part of the 

preamble about the changes to 

§ 701.23(a). 

Accordingly, for the reasons outlined 

in this portion of the preamble, new 

§ 701.23(b)(6)(iv) provides that the 

purchasing FCU’s internal written 

purchase policy must require that the 

written purchase agreement include the 

specific loans purchased (either directly 

in the agreement or through a document 

that is incorporated by reference into 


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67596 Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / Rules and Regulations 

123See attachment to NCUA Letter to FICUs 10– 

CU–03 (March 2010) available at https://

www.ncua.gov/files/letters-credit-unions/LCU2010- 

03Encl.pdf. 

the agreement); the location and 

custodian for the original loan 

documents; an explanation of the duties 

and responsibilities of the seller, 

servicer, and all parties with respect to 

all aspects of the loans being purchased, 

including servicing, default, foreclosure, 

collection, and other matters involving 

the ongoing administration of the loans, 

if applicable; and the circumstances and 

conditions under which the parties to 

the agreement may replace the servicer 

when the seller retains the servicing 

rights for the loans being purchased, if 

applicable. 

New § 701.23(b)(6)(v) 

New § 701.23(b)(6)(v) requires that 

FCUs establish certain portfolio 

concentration limits. Excessive 

concentration risk can severely impact 

the financial condition of an FCU. High 

concentrations in areas experiencing 

economic distress could result in 

significant losses exceeding an FCU’s 

net worth. An FCU’s board of directors 

and senior management have the 

responsibility to identify, manage, 

monitor, and control the risks facing the 

FCU, including concentration risk. FCU 

management must know what their 

concentration risks are and be able to 

demonstrate appropriate risk 

management and mitigation practices to 

minimize the risk of significant 

financial condition decline. 

Accordingly, new § 701.23(b)(6)(v) 

provides that a purchasing FCU’s 

internal written purchase policies must 

establish portfolio concentration limits 

by loan type and risk category in 

relation to net worth that are 

commensurate with the size, scope, and 

complexity of the credit union’s loan 

purchases. New paragraph (b)(6)(v) 

provides further that the policy limits 

must consider the potential impact of 

loan concentrations on the purchasing 

credit union’s earnings, loan loss 

reserves, and net worth. 

An FCU’s loan purchase policy 

should establish credit underwriting 

and administration requirements that 

address the risks and characteristics 

unique to the loan types permitted for 

purchase. An FCU’s loan purchase 

policy concentration limits should be 

considered for the aggregate amount of 

total purchased loans, for each loan 

type, risk factor, or category permitted. 

For example, concentration limits can 

be set by loan or collateral type but may 

also be set by associated borrower, 

origination channel, geographic area, or 

other risk category as applicable. 

An FCU’s board of directors should 

establish concentration risk limits 

commensurate with its net worth levels 

and consider how the limits fit into the 

overall strategic plan of the FCU. When 

credit union loan portfolios are 

concentrated in a small number of loan 

products that are significantly exposed 

to similar or correlated risk factors, a 

single event can impact a large portion 

of the loan portfolio and result in 

elevated losses that, if not managed 

appropriately, can lead to the credit 

union’s failure. Since the year 2000, 

more than 50 percent of the NCUA’s 

postmortems and material loss reviews 

have cited concentration risk as a 

central component of credit union 

failures. An FCU’s board of directors 

should use a comprehensive perspective 

when developing loan purchase 

concentration policy limits, including 

identifying outside forces (such as 

economic or housing price uncertainty) 

that would affect the ability to manage 

concentration risk. The parameters set 

by the board of directors should be 

specific to each portfolio and should 

include limits on loan types and thirdparty relationship exposure, at a 

minimum. The concentration risk limits 

should correlate to the FCU’s overall 

growth objectives, financial targets, and 

net worth plan. The concentration risk 

limits set forth in the FCU’s policy 

should be closely linked to those 

codified in related policies, including, 

but not limited to, real estate loans, 

member business loans, asset/liability 

management, and investment policies. 

Concentrations that exceed net worth 

must be monitored carefully, and the 

board of directors should document an 

adequate rationale for undertaking that 

level of risk.123

New § 701.23(b)(6)(vi) 

New § 701.23(b)(6)(vi) addresses 

when a legal review of agreements or 

contracts would be required. The 

written loan purchase agreement is a 

critical component of the third-party 

relationship and, as such, the 

requirement for a legal review is a key 

element in the overall risk mitigation 

and management process. By obtaining 

legal advice regarding third-party 

contracts, an FCU can ensure its legal 

and business interests are appropriately 

protected, and the board of directors 

and senior management understand the 

risks, rights, and responsibilities of each 

party to the written loan purchase 

agreement. Accordingly, new 

§ 701.23(b)(6)(vi) provides that an FCU’s 

internal written purchase policy must 

address when a legal review of 

agreements or contracts will be 

performed to ensure that the legal and 

business interests of the credit union are 

protected against undue risk. 

A legal review of the written loan 

purchase agreements and contracts will 

help an FCU ensure that the board of 

directors and senior management 

understand the rights and 

responsibilities of each party. For 

example, the review could identify 

which party bears the costs of collateral 

disposition, whether there are recourse 

arrangements, or whether the agreement 

includes a commitment for the 

purchasing FCU to make additional loan 

purchases and describe the interest 

being purchased. A legal review may 

also reduce a credit union’s legal, 

compliance, or reputation risk by 

ensuring that the written loan purchase 

agreement complies with all applicable 

state and federal laws. 

Further, an FCU should understand 

what actions it may take if the contract 

is breached or services are not 

performed as expected. For example, the 

legal review could determine if the 

written loan purchase agreements 

include recourse language that requires 

a seller to buy back loans with missing 

documents, made outside of policy, or 

otherwise not in conformance with 

representations and warranties. The 

written loan purchase agreement is a 

critical component of the third-party 

relationship and, as such, a legal review 

is a key element in the overall risk 

mitigation and management process. 

Section 701.23(c) Sale 

The final rule makes a nonsubstantive conforming change to 

current § 701.23(c)(1). In addition, the 

final rule makes certain substantive 

changes to paragraph (c)(2) and adds 

new paragraphs (c)(3) and (4), which are 

discussed in more detail in the 

following paragraphs. No changes are 

made in the introductory sentence to 

current § 701.23(c). 

Section 701.23(c)(1) 

As required by the changes discussed 

in the following paragraphs, the final 

rule makes a conforming amendment to 

current § 701.23(c)(1). The conforming 

amendment removes the ‘‘and’’ at the 

end of the provision to allow for an 

additional provision to be added under 

§ 701.23(c)(2). No substantive change to 

this provision is intended. 

Public Comments 

One commenter recommended 

amending proposed § 701.23(c)(1) to 

provide that ‘‘the Board or a committee 

of the Board assigned with that 

responsibility by the Board approves the 

sale.’’ The commenter suggested it is not 


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124See 12 CFR 749.5. 

125See generally part 749; and NCUA Legal Op. 

07–0812 (Jan. 2008), available at https://

www.ncua.gov/regulation-supervision/legalopinions/2008/electronic-retention-records. 

necessarily an investment committee 

that would normally be dealing with 

loan issues—indeed, an overarching 

asset liability management committee, 

or a lending committee, or an executive 

committee, could each be tasked with 

such a role as within their core activities 

and competencies—and various 

institutions use different names for their 

committees, and the reference to 

‘‘investment committee’’ is highly 

specific. 

Discussion 

The Board did not propose 

substantive changes to § 701.23(c)(1), so 

the changes suggested above would go 

beyond the scope of this rulemaking. 

The comments will be retained, 

however, for consideration in future 

rulemakings related to § 701.23. 

Accordingly, the Board adopts the 

changes to paragraph (c)(1) as proposed 

for the reasons set forth in the notice of 

proposed rulemaking. 

Section 701.23(c)(2) 

The final rule amends current 

§ 701.23(c)(2) to change the retention 

requirements for the written agreement 

and schedule of eligible obligations sold 

by an FCU. The Board believes that this 

would result in only a minor technical 

change to current § 701.23(c)(2). Under 

the final rule, the FCU selling the 

eligible obligations will still be required 

to retain the written loan sales 

agreement and a schedule of the eligible 

obligations covered by the agreement. 

The Board acknowledges the 

requirement for the FCU to retain the 

written loan sales agreement and 

schedule of the eligible obligations in 

the seller’s office could imply that the 

written loan sales agreement and 

schedule be retained in a hard-copy 

format, which is outdated given the 

current digital environment. An FCU 

might choose to store its records in 

electronic format, in the cloud, or 

housed in off-site servers or databases. 

This change will align § 701.23(c)(2) 

with the NCUA’s regulations and 

guidelines for FICUs on records 

preservation programs. Under part 749, 

the NCUA does not require or 

recommend a particular format for 

record retention. If the credit union 

stores records on microfilm, microfiche, 

or in an electronic format, the stored 

records must be accurate, reproducible, 

and accessible to an NCUA examiner.124

If records are stored on the credit union 

premises, they should be immediately 

accessible upon the examiner’s request; 

if records are stored by a third party or 

off site, then they should be made 

available to the examiner within a 

reasonable time after the examiner’s 

request. The credit union must maintain 

the necessary equipment or software to 

permit an examiner to review and 

reproduce stored records upon request. 

The credit union should also ensure that 

the reproduction is acceptable for 

submission as evidence in a legal 

proceeding.125 Accordingly, 

§ 701.23(c)(2) of the final rule provides 

that a written agreement, and a schedule 

of the eligible obligations covered by the 

agreement, is retained by the selling 

credit union that identifies the specific 

loans being sold either directly in the 

agreement or through a document that is 

incorporated by reference into the 

agreement. 

New § 701.23(c)(3) 

The final rule adds new paragraph 

(c)(3) to § 701.23 to require a legal 

review of the written agreement to 

protect the legal and business interests 

of the selling FCU. A legal review of the 

written loan sales agreements and 

contracts will help an FCU ensure that 

the board of directors and senior 

management understand the rights and 

responsibilities of each party. For 

example, the legal review would make 

clear which party bears the costs of 

collateral disposition, whether there are 

recourse arrangements, whether the 

agreement includes a commitment for 

the purchasing credit union to make 

additional loan purchases, and whether 

the agreement describes the interest 

being purchased. The legal review 

would also ensure that the written loan 

sales agreement complies with all 

applicable state and federal laws, 

helping to minimize a credit union’s 

legal, compliance, and reputation risk. 

The legal review should address loan 

and collateral documentation and 

information that the selling party is 

required to share with the purchasing 

party, status reports on payments and 

interest accrual, exit strategies, 

procedures for modifying loan terms, 

notification of adverse loan events, and 

collection procedures if servicing rights 

are retained by the seller. Further, an 

FCU should understand what actions it 

may take if the contract is breached or 

services are not performed as expected. 

The written loan sales agreement is a 

critical component of the third-party 

relationship and, as such, the 

requirement for a legal review is a key 

element in the overall risk mitigation 

and management process. 

Accordingly, new § 701.23(c)(3) 

requires a legal review of the written 

agreement is completed that includes 

the terms, recourse, and risk-sharing 

arrangements, and, as applicable, loan 

administration and controls, to ensure 

that the selling FCU’s legal and business 

interests are protected from undue risks. 

Public Comments 

One commenter noted their support 

for the proposed legal review 

requirement in § 701.23(c)(3) regarding 

the sale of eligible obligations for the 

reasons provided in the proposal. 

Another commenter suggested that 

requiring a legal review of agreements 

seems unnecessary, as most credit 

unions already use legal counsel for the 

drafting or review of agreements, and 

those that do not perhaps have adequate 

internal expertise or expect to engage in 

a certain activity in such a modest way 

that it poses no material risk. The 

commenter suggested further that the 

requirement for legal review seems 

overly intrusive to a credit union’s 

responsibility to understand and 

manage its risks. 

Discussion 

In response to comments received, the 

Board is adopting the changes to 

§ 701.23(c)(3) as proposed, for the 

reasons set forth in the notice of 

proposed rulemaking, with one 

amendment. After reviewing the 

comments, the Board agrees that there 

may be types of routine agreements that 

do not require legal review by an 

attorney and that FCUs should be 

responsible for understanding and 

managing their own risks. In recognition 

of this, the final rule removes the word 

‘‘legal’’ the first place it appears in 

proposed § 701.23(c)(3). This change 

allows FCUs to determine, consistent 

with safety and soundness, what level of 

review is required to ensure that the 

selling FCU’s legal and business 

interests are protected from undue risks. 

For example, for most complex 

transactions FCUs must perform a legal 

review of the agreements because only 

a qualified attorney can reasonably 

ensure that the selling FCU’s legal and 

business interests are protected in such 

situations. On the other hand, for 

routine transactions involving simple 

agreements, review by a non-attorney 

member of the FCU’s staff may be all 

that is necessary to ensure that the 

selling FCU’s legal and business 

interests are protected. Accordingly, 

§ 701.23(c)(3) of the final rule requires 

that a review of the written agreement 

is completed that includes the terms, 

recourse, and risk-sharing arrangements, 

and, as applicable, loan administration 


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67598 Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / Rules and Regulations 

126See § 749.2. 

127See 12 CFR 749.5. 

128See generally part 749; and NCUA Legal Op. 

07–0812 (Jan. 2008), available at https://

www.ncua.gov/regulation-supervision/legalopinions/2008/electronic-retention-records. 129Emphasis added. 

and controls, to ensure that the selling 

FCU’s legal and business interests are 

protected from undue risks. 

Section 701.23(d) Pledge 

The final rule amends current 

§ 701.23(d)(1)(iii) to amend the retention 

requirements for agreements covering 

eligible obligations pledged by an FCU. 

The Board believes that this will result 

in only a minor technical change to 

current § 701.23(d)(1)(iii). Under the 

final rule, the FCU pledging the eligible 

obligations would still be required to 

retain the written agreement covering 

the pledging arrangement. The Board 

acknowledges the requirement for the 

FCU that pledges the eligible obligations 

to retain the written agreement in the 

office could imply that the written 

agreement should be retained in a hardcopy format, which is outdated given 

the current digital environment. An 

FCU might choose to store its records in 

electronic format, in the cloud, or 

housed in off-site servers or databases. 

The Board’s intent is that the FCU that 

pledges the eligible obligations make the 

written agreement covering the pledging 

arrangement available upon request.126

This change will align this 

requirement with the NCUA’s 

regulations and guidelines for FICUs on 

records preservation programs. Under 

part 749, the NCUA does not require or 

recommend a particular format for 

record retention. If the credit union 

stores records on microfilm, microfiche, 

or in an electronic format, the stored 

records must be accurate, reproducible, 

and accessible to an NCUA examiner.127

If records are stored on the credit union 

premises, they should be immediately 

accessible upon the examiner’s request; 

if records are stored by a third party or 

off site, then they should be made 

available to the examiner within a 

reasonable time after the examiner’s 

request. The credit union must maintain 

the necessary equipment or software to 

permit an examiner to review and 

reproduce stored records upon request. 

The credit union should also ensure that 

the reproduction is acceptable for 

submission as evidence in a legal 

proceeding.128

Accordingly, § 701.23(d)(1)(iii) of the 

final rule requires that a written 

agreement covering the pledging 

arrangement is retained by the credit 

union that pledges the eligible 

obligations. 

Section 701.23(g) Payments and 

Compensation 

The final rule amends current 

§ 701.23(g) by adding a paragraph 

heading. The Board believes that this 

amendment will result in only a minor 

technical change to paragraph (g). The 

amended rule would add the three-word 

descriptive heading ‘‘Payments and 

compensation’’ for this section of the 

rule but does not add any additional 

requirements or make any other 

changes. Accordingly, § 701.23(g) has 

the paragraph heading ‘‘Payments and 

compensation.’’ 

Section 701.23(i) Temporary Regulatory 

Relief in Response to COVID–19 

The final rule does not extend the 

regulatory relief in § 701.23(i) that the 

Board approved in April of 2020 in 

response to COVID–19. Paragraph (i) 

provided that, notwithstanding 

§ 701.23(b), during the period 

commencing on April 21, 2020, and 

concluding on December 31, 2022, an 

FCU may: purchase, in whole or in part, 

and within the limitations of the board 

of directors’ written purchase policies, 

any eligible obligations pursuant to 

paragraph (b)(1)(i) and (b)(2)(i) without 

regard to whether they are loans the 

credit union is empowered to grant or 

are refinancing to ensure the obligations 

are ones the purchasing credit union is 

empowered to grant; and purchase and 

hold the obligations described in 

§ 701.23(b)(2)(i) through (iv) if the FCU’s 

CAMELS composite rating is ‘‘1,’’ ‘‘2,’’ 

or ‘‘3.’’ 129 This temporary relief sunset 

on December 31, 2022, and was 

removed from the NCUA’s regulations 

by the Office of the Federal Register 

shortly thereafter as part of their regular 

editing and review process. 

Public Comments 

One commenter recommended the 

NCUA study the extent to which the 

flexibility provided in the expired 

temporary regulatory relief was used by 

credit unions, along with any increased 

risk associated with transactions made 

that would not otherwise have been 

permitted and consider providing such 

regulatory relief to address future 

system challenges that may not 

necessarily rise to the level of the 

COVID–19 pandemic. 

Discussion 

The Board appreciates the comments 

that were submitted regarding 

expiration of the temporary regulatory 

relief under § 701.23(g). The temporary 

regulatory relief provided under 

paragraph (g) expired on December 31, 

2022. The Board will consider 

approving temporary regulatory relief 

again in the future if circumstances 

warrant. 

B. Part 714—Leasing 

Section 714.2(b) 

In the proposal, the Board requested 

comment on the placement of the 

definition of indirect leasing 

arrangement in § 701.21, as opposed to 

part 714 of the NCUA’s regulations. In 

particular, the Board requested 

comments on whether stakeholders 

would find it clearer or more userfriendly to codify the definition of 

indirect leasing arrangement in part 714. 

The Board received no comments 

directly in response to this question. 

Although not raised by commenters, 

the Board believes the relationship 

between the indirect leasing provisions 

in § 701.21 and part 714 should be 

clarified by pointing out the 

relationship between the two sections to 

readers of part 714. To do this, the final 

rule adds brief language and a cross 

citation to the first sentence in 

§ 714.2(b) pointing readers to 

§ 701.21(c)(9) and helping them to make 

the connection between the two 

sections. No substantive change to the 

NCUA’s regulations is intended by 

adding this clarifying cross citation. 

Accordingly, the first sentence in 

§ 714.2(b), as amended, provides that an 

FCU may engage in indirect leasing as 

described under § 701.21(c)(9) of the 

NCUA’s regulations. 

Section 714.9 [Removed and Reserved] 

Current § 714.9 provides that the 

indirect leasing arrangements of an FCU 

are not subject to the eligible obligation 

limit if they satisfy the provisions of 

§ 701.23(b)(3)(iv) that require that FCUs 

make the final underwriting decision 

and that the lease contract is assigned to 

the FCU very soon after it is signed by 

the member and the dealer or leasing 

company. The reference in current 

§ 714.9 cites to § 701.23(b)(3)(iv), but 

there is no paragraph (b)(3)(iv) in that 

section. It is clear from the ‘‘eligible 

obligations limit’’ language in current 

§ 714.9, however, that the cross citation 

is intended to reference the exclusion 

from the 5-percent limitation in current 

§ 701.23(b)(4)(iv). Because this final rule 

amends § 701.23(b)(4) to remove 

paragraph (b)(4)(iv) and will no longer 

apply the 5-percent limitation to any 

purchases of eligible obligations, as 

explained earlier in the preamble, 

current § 714.9 is rendered moot by this 

final rule. Accordingly, this final rule 

removes the language in current § 714.9 


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130See 80 FR 57512 (Sept. 24, 2015). 

131 44 U.S.C. 3507(d). 132 5 U.S.C. 801–804. 

and reserves the blank section for future 

use. 

IV. Regulatory Procedures 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

generally requires that, in connection 

with a final rulemaking, an agency 

prepare and make available for public 

comment a final regulatory flexibility 

analysis that describes the impact of the 

final rule on small entities. A regulatory 

flexibility analysis is not required, 

however, if the agency certifies that the 

rule will not have a significant 

economic impact on a substantial 

number of small entities (defined for 

purposes of the RFA to include credit 

unions with assets less than $100 

million) 130 and publishes its 

certification and a short, explanatory 

statement in the Federal Register 

together with the rule. 

The Board fully considered the 

potential economic impact of the 

changes made by this final rule during 

its development. As noted in the 

preamble, the final rule clarifies the 

NCUA’s current regulations and 

provides additional flexibilities to 

FICUs, making it easier to take 

advantage of advanced technologies and 

opportunities offered by the fintech 

sector. 

The final rule does not impose any 

new significant burden on FICUs and 

may ease some existing requirements. 

Small FICUs are not obligated to buy 

and sell eligible obligations and loan 

participations. Additionally, while the 

final rule introduces risk management 

and due diligence policy expectations, 

FICUs have the flexibility to tailor 

required processes and policies to fit 

within their existing governance 

framework and commensurate with 

their size and complexity. Accordingly, 

the NCUA certifies that this final rule 

will not have a significant economic 

impact on a substantial number of small 

FICUs. 

Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA) applies to rulemakings in which 

an agency by rule creates a new 

paperwork burden on regulated entities 

or modifies an existing burden.131 For 

purposes of the PRA, a paperwork 

burden may take the form of a reporting, 

disclosure, or recordkeeping 

requirement, each referred to as an 

information collection. The NCUA may 

not conduct or sponsor, and the 

respondent is not required to respond 

to, an information collection unless it 

displays a currently valid Office of 

Management and Budget (OMB) control 

number. 

The rule as previously published 

contains information collections in the 

form of a written policy requirement 

and a transaction documentation 

requirement, covered by OMB control 

numbers 3133–0127 (Purchase, Sale, 

and Pledge of Eligible Obligations) and 

3133–0141(Organization and Operations 

of Federal Credit Unions—Loan 

Participation). The proposed changes to 

part 701 did not affect the burdens 

under OMB Control Numbers 3133– 

0127 and 3133–0141. Adjustments to 

the burdens reflect a reduction in the 

current number of credit unions or to 

reflect a more accurate response rate per 

respondent. Under OMB Control 

Number 3133–0127, the number of 

respondents decreased; thereby, 

decreasing the burden to 1,830 annual 

hours. The NCUA estimates that the 

burden will increase, however, under 

OMB Control Number 3133–0141 by 

4,994 annual burden hours because the 

responses per respondent will likely 

increase. 

Executive Order 13132 

Executive Order 13132 encourages 

independent regulatory agencies to 

consider the impact of their actions on 

state and local interests. The NCUA, an 

independent regulatory agency as 

defined in 44 U.S.C. 3502(5), voluntarily 

complies with the principles of the 

executive order to adhere to 

fundamental federalism principles. This 

final rule would reduce regulatory 

burdens on, and expand the authority 

of, federally insured credit unions, 

including federally insured, statechartered consumer credit unions to 

purchase certain loans and loan 

participations. It may have, to some 

degree, a direct effect on the states, on 

the relationship between the federal 

government and the states, or on the 

distribution of power and 

responsibilities among the various 

levels of government. It does not, 

however, rise to the level of material 

impact for purposes of Executive Order 

13132. 

Assessment of Federal Regulations and 

Policies on Families 

The NCUA has determined that this 

final rule will not affect family wellbeing within the meaning of section 654 

of the Treasury and General 

Government Appropriations Act, 1999, 

Public Law 105–277, 112 Stat. 2681 

(1998). 

Small Business Regulatory Enforcement 

Fairness Act (Congressional Review Act) 

The Small Business Regulatory 

Enforcement Fairness Act of 1996 (Pub. 

L. 104–121) (SBREFA) generally 

provides for congressional review of 

new agency rules that qualify as 

‘‘major’’ under criteria specified in the 

Act.132 Analysis performed by the Office 

of the Chief Economist (OCE) at NCUA 

indicates the rule falls well short of 

qualifying as a ‘‘major’’ by those criteria. 

As required by SBREFA, the NCUA is 

submitting this final rule and its 

economic impact analysis to the Office 

of Management and Budget for 

concurrence on the ‘‘not major’’ 

determination. The NCUA also will file 

all other appropriate congressional 

reports. 

List of Subjects 

12 CFR Part 701 

Advertising, Aged, Civil rights, Credit, 

Credit unions, Fair housing, Individuals 

with disabilities, Insurance, Marital 

status discrimination, Mortgages, 

Religious discrimination, Reporting and 

recordkeeping requirements, Sex 

discrimination, Signs and symbols, 

Surety bonds. 

12 CFR Part 714 

Credit unions, Leasing, Reporting and 

recording keeping requirements. 

By the National Credit Union 

Administration Board on September 21, 

2023. 

Melane Conyers-Ausbrooks, 

Secretary of the Board. 

For the reasons discussed in the 

preamble, the Board amends 12 CFR 

parts 701 and 714 as follows: 

PART 701—ORGANIZATION AND 

OPERATION OF FEDERAL CREDIT 

UNIONS 

■ 1. The authority citation for part 701 

continues to read as follows: 

Authority: 12 U.S.C. 1752(5), 1755, 1756, 

1757, 1758, 1759, 1761a, 1761b, 1766, 1767, 

1782, 1784, 1785, 1786, 1787, 1788, 1789. 

Section 701.6 is also authorized by 15 U.S.C. 

3717. Section 701.31 is also authorized by 15 

U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601– 

3610. Section 701.35 is also authorized by 42 

U.S.C. 4311–4312. 

■ 2. Amend § 701.21 by adding 

paragraph (c)(9) to read as follows: 

§ 701.21 Loans to members and lines of 

credit to members. 

* * * * * 

(c) * * * 

(9) Indirect lending and indirect 

leasing arrangements—(i) Definitions. 


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For purposes of this chapter, the 

following definitions apply: 

Indirect leasing arrangement means a 

written agreement to purchase leases 

from the leasing company where the 

purchaser makes the final underwriting 

decision, and the lease agreement is 

assigned to the purchaser very soon 

after it is signed by the member and the 

leasing company. 

Indirect lending arrangement means a 

written agreement to purchase loans 

from the loan originator where the 

purchaser makes the final underwriting 

decision regarding making the loan, and 

the loan is assigned to the purchaser 

very soon after the inception of the 

obligation to extend credit. 

(ii) Indirect lending. A loan acquired 

pursuant to an indirect lending 

arrangement, and that meets the 

requirements of this section, is 

classified as a loan and not the purchase 

of a loan for purposes of this chapter. 

(iii) Indirect leasing. A lease acquired 

pursuant to an indirect leasing 

arrangement, and that meets the 

requirements of part 714 of this chapter, 

is classified as a lease and not the 

purchase of a lease for purposes of this 

chapter. 

* * * * * 

■ 3. Amend § 701.22 by: 

■ a. Revising the introductory text; and 

■ b. Revising the definition of 

‘‘Originating lender’’ in paragraph (a). 

The revisions read as follows: 

§ 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. 

Federally insured, state-chartered credit 

unions are required by § 741.225 of this 

chapter to comply with the loan 

participation requirements of this 

section. This section does not apply to 

corporate credit unions, as that term is 

defined in § 704.2 of this chapter. 

(a) * * * 

Originating lender means the 

participant with which the borrower 

initially or originally contracts for a loan 

and who, thereafter or concurrently 

with the funding of the loan, sells 

participations to other lenders. 

Originating lender includes a 

participant that acquires a loan through 

an indirect lending arrangement as 

defined under § 701.21(c)(9). 

* * * * * 

■ 4. Amend § 701.23 by: 

■ a. Revising the introductory text, 

paragraph (a), the heading to paragraph 

(b); 

■ b. Adding a heading to paragraph 

(b)(1) and (b)(1)(i); 

■ c. Revising paragraph (b)(1)(ii); 

■ d. Adding a heading to paragraphs 

(b)(1)(iii) and (iv); 

■ e. Removing the word ‘‘mortage’’ from 

the first sentence in paragraph (b)(1)(iv) 

and adding in its place the word 

‘‘mortgage’’; 

■ f. Revising paragraphs (b)(2) 

introductory text, and (b)(2)(ii); 

■ g. Adding a heading to paragraph 

(b)(3); 

■ h. Revising paragraph (b)(3)(ii), and 

(b)(4) and (5); 

■ i. Adding paragraph (b)(6); 

■ j. Revising paragraphs (c)(1) and (2); 

■ k. Adding paragraph (c)(3); 

■ l. Revising paragraph (d)(1)(iii); and 

■ m. Adding a heading to paragraphs (g) 

and (h)(1). The revisions and additions 

read as follows: 

§ 701.23 Purchase, sale, and pledge of 

loans. 

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 certain exceptions. 

For purchases of eligible obligations, 

except as otherwise described under 

paragraph (b) of this section, the 

borrower must be a member of the 

purchasing Federal credit union before 

the purchase is made. 

(a) Definitions. For purposes of this 

section: 

Eligible obligation means a whole 

loan or part of a loan (other than a note 

held by a liquidating credit union) that 

does not meet the definition of a loan 

participation under § 701.22(a). 

Liquidating credit union means: 

(i) In the case of a voluntary 

liquidation, a credit union is a 

liquidating credit union as of the date 

the members vote to approve 

liquidation. 

(ii) In the case of an involuntary 

liquidation, a credit union is a 

liquidating credit union as of the date 

the board of directors is served an order 

of liquidation issued by either the 

NCUA or the state supervisory 

authority. 

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 of loans. (1) Purchase of 

obligations from any source. * * * 

(i) Eligible obligations. * * * 

(ii) Notes of a liquidating credit 

union’s individual members. Notes of a 

liquidating credit union’s individual 

members, from the liquidating credit 

union; 

(iii) Student loans. * * * 

(iv) Real estate-secured loans. * * * 

* * * * * 

(2) Purchases of obligations from a 

FICU. A Federal credit union may 

purchase and hold the following 

obligations, provided that it would be 

empowered to grant them: 

* * * * * 

(ii) Notes of a liquidating credit 

union. Notes of a liquidating credit 

union, without regard to whether they 

are notes of the liquidating credit 

union’s members; 

* * * * * 

(3) Other requirements. * * * 

(ii) A written agreement and a 

schedule of the eligible obligations 

covered by the agreement are retained 

by the purchaser; and 

* * * * * 

(4) Five-percent limitation. The 

aggregate of the unpaid balance of notes 

purchased under paragraphs (b)(1)(ii) 

and (b)(2)(ii) of this section shall not 

exceed 5 percent of the unimpaired 

capital and surplus of the purchaser. 

(5) Grandfathered purchases. Subject 

to safety and soundness considerations, 

a Federal credit union may hold any of 

the loans described in paragraph (b) of 

this section that were acquired before 

October 30, 2023; provided the 

transaction complied with this section 

at the time the transaction was 

executed. 

(6) Written purchase policies. 

Purchases of eligible obligations and 

notes of liquidating credit unions must 

comply with the purchasing Federal 

credit union’s internal written purchase 

policies, which must: 

(i) Require that the purchasing 

Federal credit union conduct due 

diligence on the seller of the loans and 

other counterparties to the transaction 

prior to the purchase. 

(ii) Establish risk assessment and risk 

management process requirements that 

are commensurate with the size, scope, 

type, complexity, and level of risk posed 

by the planned loan purchase activities. 

(iii) Establish internal underwriting 

and ongoing monitoring standards that 

are commensurate with the size, scope, 

type, complexity, and level of risk posed 

by the loan purchase activities. 

Underwriting and ongoing monitoring 

standards must address the borrower’s 

creditworthiness and ability to repay, 

and the support provided by collateral 

if the collateral was used as part of the 

credit decision. 


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Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / Rules and Regulations 67601 

(iv) Require that the written purchase 

agreement include: 

(A) The specific loans being 

purchased (either directly in the 

agreement or through a document that is 

incorporated by reference into the 

agreement); 

(B) The location and custodian for the 

original loan documents; 

(C) An explanation of the duties and 

responsibilities of the seller, servicer, 

and all parties with respect to all 

aspects of the loans being purchased, 

including servicing, default, foreclosure, 

collection, and other matters involving 

the ongoing administration of the loans, 

if applicable; and 

(D) The circumstances and conditions 

under which the parties to the 

agreement may replace the servicer 

when the seller retains the servicing 

rights for the loans being purchased, if 

applicable. 

(v) Establish portfolio concentration 

limits by loan type and risk category in 

relation to net worth that are 

commensurate with the size, scope, and 

complexity of the credit union’s loan 

purchases. The policy limits must 

consider the potential impact of loan 

concentrations on the purchasing credit 

union’s earnings, loan loss reserves, and 

net worth. 

(vi) Address when a legal review of 

agreements or contracts will be 

performed to ensure that the legal and 

business interests of the credit union are 

protected against undue risk. 

(c) * * * 

(1) The board of directors or 

investment committee approves the 

sale; 

(2) A written agreement, and a 

schedule of the eligible obligations 

covered by the agreement, is retained by 

the selling credit union that identifies 

the specific loans being sold either 

directly in the agreement or through a 

document that is incorporated by 

reference into the agreement; and 

(3) A review of the written agreement 

is completed that includes the terms, 

recourse, and risk-sharing arrangements, 

and, as applicable, loan administration 

and controls, to ensure that the selling 

Federal credit union’s legal and 

business interests are protected from 

undue risks. 

(d) * * * 

(1) * * * 

(iii) A written agreement covering the 

pledging arrangement is retained by the 

credit union that pledges the eligible 

obligations. 

* * * * * 

(g) Payments and compensation— 

* * * 

(h) Additional authority—(1) 

Expanded purchase authority. * * * 

* * * * * 

PART 714—LEASING 

■ 5. The authority citation for part 714 

continues to read as follows: 

Authority: 12 U.S.C. 1756, 1757, 1766, 

1785, 1789. 

■ 6. Amend § 714.2 by revising 

paragraph (b) to read as follows: 

§ 714.2 What are the permissible leasing 

arrangements? 

* * * * * 

(b) You may engage in indirect leasing 

as described under § 701.21(c)(9) of this 

chapter. In indirect leasing, a third party 

leases property to your member and you 

then purchase that lease from the third 

party for the purpose of leasing the 

property to your member. You do not 

have to purchase the leased property if 

you comply with the requirements of 

§ 714.3. 

* * * * * 

§ 714.9 [Removed and Reserved] 

■ 7. Remove and reserve § 714.9. 

[FR Doc. 2023–20950 Filed 9–28–23; 8:45 am] 

BILLING CODE 7535–01–P 


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