Banking Interpretations

NYSBL 454; 483

New York State Banking Department
Memorandum

Issue

Should the Department approve the Credit Union's request to purchase HELOCs from the Bank?
 
Recommendation

The Department should not approve [---] Credit Union's request to purchase HELOCs from the Bank because the loans in question are to non-members of [---] Credit Union.

Background/Reasoning

The Credit Union proposes to purchase a pool of loans from the Bank. The specific transaction involves the credit union acquiring an estimated $[---] in home equity line of credit loans from the Bank. The details of the transaction, as well as supporting documentation, were attached to your memorandum of December 12, 2006 sent to Sara Kelsey.
 
Based on the information you provided as well as an e-mail of 12/27/06 from the Credit Union's counsel to support of its request, I would object to the proposed purchase.
 
The Credit Union' counsel, in support of its request, states that the transaction is intended to be an opportunity to purchase loans with the added benefit of obtaining new members for the Credit Union. He cites the Commitment Letter and the Loan Sale Agreement, which provide that the transaction is subject to "memberization" of the borrowers. This term is explained as meaning that in the event the borrowers do not become members of the Credit Union within a specified period, the Bank agrees to repurchase those particular loans. Counsel concludes that the transaction will not result in any loans to non-members.

We disagree. The transaction calls for the purchase of loans of borrowers who are not members of the Credit Union. That the Bank agrees to repurchase loans if the borrowers do not become members of the Credit Union, does not negate the fact that the Credit Union will have acquired loans made to non-members and will have held those loans for at least a brief period. Therefore, counsel's conclusion that the transaction will not result in any loans to non-members is erroneous.

A credit union may not purchase loans made to non-members, except as otherwise explained in the analysis below.

Under the Banking law, it is abundantly clear that the Credit Union may not make loans to non-members. Section 483 of the Banking law provides that

Any officer, director or member of a committee of a credit union who knowingly permits a loan to be made or participates in a loan to a non-member of the corporation shall be guilty of a misdemeanor and shall be primarily liable to the corporation for the amount thus illegally loaned, and the illegality of such a loan shall be no defense in any action by the corporation to recover the amount lent. (Emphasis added.)

Despite this general prohibition, there is specific authority for a credit union to participate in certain loans to non-members. Section 454.35 of the Banking law provides that among other powers that a credit union has is the following power:

To participate in loans to credit union members jointly with other credit unions, credit union organizations, or other banking organizations pursuant to written policies established by the board of directors; provided that a credit union which originates a loan for which participation arrangements are made shall retain an interest in at least ten percent of the face amount of the loan. The member of the originating credit union benefiting from the proceeds of the loan need not be within the field of membership of the other credit unions participating in the loan.

The scenario in the question before us does not fall within Section 454.35 of the Banking law for two reasons. First, our situation calls for the Credit Union to purchase loans after they have been originated rather than participating jointly in the origination of the loans. Second, in our case, the Credit Union proposes to acquire 100% of the loan balances in question, whereas the statute would permit a participation of no more than 90% of the loan balances.

There is no other provision in the Banking Law, including those enumerated in Section 454, that provides for a credit union to have the power to purchase loans made to a non-member by another lender.

In sum, therefore, a credit union may not purchase a loan to a non-member, including a HELOC.

Noted _____
          S.A.K.