Member Business Loan Requirements

Mary Beth M. Wong, Esq.
Ashford & Wriston
Post Office Box 131
Honolulu, Hawaii 96810

Re: Member Business Loan Requirements, §701.21(h), for Participation Loans,

§701.22(d)(1).

Dear Ms. Wong:

We apologize for the delay in our response. You have asked several questions regarding the application of §701.21(h)(1)(i)(C), Member Business Loans, to §701.22(d)(1), Loan Participations. Your questions concern whether a participation loan interest in a member business loan must satisfy the member business loan requirements.

Under §701.21(h)(1)(i)(C), a loan, otherwise meeting the definition of a member business loan, is not considered a business loan if the loan amount, when added to other business loans of a borrower, is less than $50,000. A federal credit union's participation interest in a business loan does not have to satisfy the member business loan requirements if the participation loan amount, when added to other business loans of the borrower, is less than $50,000.

Your questions and our responses are below.

Hypothetical 1:

Credit Union A is the originating lender of a $75,000 member business loan (Loan 1) and a $100,000 member business loan (Loan 2) to John Doe. Credit Union B wants to acquire a participation interest of $10,000 in Loan 1 and $20,000 in Loan 2. Credit Union B makes no other loans, directly or by participation, to John Doe or any associated member. Do Loan 1 and Loan 2 have to satisfy the member business loan requirements of Credit Union B?

No, the loans are not considered member business loans because the amount of Credit Union B's participation interests in Loan 1 and Loan 2 does not exceed $50,000, separately or combined.

Hypothetical 2:

Credit Union B wants to acquire, contemporaneously, a $30,000 participation interest in Loan 1 and a $35,000 participation interest in Loan 2. If Loan 1 and Loan 2 are acquired together, must both loans satisfy the member business loan requirements of Credit Union B?

No, only one of the loans has to satisfy the member business loan requirements. The reason is that the contemporaneous purchase of Loan 1 and Loan 2 is treated as the purchase of two separate loans by Credit Union B. Thus, if Credit Union B acquired Loan 1 first, the loan would be exempt from the member business loan requirements because it is less than $50,000. Thereafter, if Credit Union B acquired Loan 2, Loan 2 must satisfy the member business loan requirements because the amount of Loan 2 when added to Loan 1 exceeds $50,000.

Hypothetical 3:

Assuming the facts in Hypothetical 1, Credit Union B now wants to acquire an additional participation interest of $60,000 in a member business loan (Loan 3) made to John Doe from Credit Union A.

A. Can Credit Union B acquire a participation loan interest in Loan 3 irrespective of whether Loan 1 and Loan 2 have satisfied the member business loan requirements of Credit Union B?

Yes, Credit Union B can acquire a participation interest of $60,000 in Loan 3 provided Loan 3 satisfies Credit Union B's member business loan requirements.

B. Can Credit Union B acquire a participation interest in Loan 3 if Loan 3 does not satisfy the member business requirements of Credit Union B but if the outstanding principal amounts of Loan 1 and Loan 2, when added to the proposed amount for Loan 3, is less than $50,000?

Yes, Credit Union B may acquire a participation interest in Loan 3, if the outstanding principal balances on Loan 1 and Loan 2, when added to the proposed amount for Loan 3, do not exceed $50,000.