We are not aware of any laws or regulations that would prohibit a national bank from repurchasing portions of a loan originally sold pursuant to a participation agreement, provided that the purchase does not violate your institution’s current legal lending limits at the time of repurchasing and provided that the repurchase is not in violation of the relevant participation agreement.

While not directly applicable to national banks, the Illinois Department of Financial and Professional Regulation has published an interpretive letter addressing whether a state bank may repurchase portions of a loan participation originally sold to comply with legal lending limits when doing so will not violate legal lending limits currently in place at the time of repurchasing. It concludes that “[l]oan balances sold to comply with legal lending limits may be repurchased when doing so will not violate legal lending limits at the time of the repurchase. . . . Nothing in the definitions or provisions of the [Illinois Banking] Act, the Commissioner’s letter or examination guideline prohibits the repurchase of that same loan balance initially sold to comply with the Statutory Limit.”

Additionally, we recommend expressly including such repurchase rights in your participation agreements if they are not included already. OCC Bulletin 2020-81 outlines sound risk management for national banks’ loan purchase activities, including loan participations, which should include “written documentation. . . outlining the rights and obligations of each party,” and policies and procedures that address “requirements for purchase agreements, including rights and obligations concerning repurchase or recourse arrangements.” Consequently, we recommend that any repurchasing rights your bank wishes to retain in loans sold pursuant to a loan participation be clearly set out in the relevant agreement.

For resources related to our guidance, please see:

• IDFPR, Interpretive Letter 95-6 (August 1, 1995) (“The subsidiary banks of * (‘Banks’) originated certain loans which exceeded Banks’ legal lending limitations when made. Banks sold portions of these loans to non-affiliated banks to avoid violating each bank’s legal lending limit. . . . [C]hanges in the calculation of the legal lending limit increased the legal lending limit for Banks. Banks now desire to repurchase portions of the loan participations sold, increasing the loan balances to the amounts now permitted by the increase in Banks’ legal lending limits. . . . Loan balances sold to comply with legal lending limits may be repurchased when doing so will not violate legal lending limits at the time of the repurchase. . . . Nothing in the definitions or provisions of the Act, the Commissioner’s letter or examination guideline prohibits the repurchase of that same loan balance initially sold to comply with the Statutory Limit. This activity is acceptable as long as the balance of the total loan does not violate the bank’s current Statutory Limit.”)

• OCC Bulletin 2020-81, Credit Risk: Risk Management of Loan Purchase Activities (September 10, 2020) (“Sound risk management of loan purchase activities generally includes . . . written documentation of transfer, servicing, events of default, collections, and recourse arrangements outlining the rights and obligations of each party. . . . Sound risk management includes policies that are consistent with the bank’s strategic plan and risk appetite, while procedures support effective processes for engaging in loan purchase activities. Typically, policies and procedures address. . . . requirements for purchase agreements, including rights and obligations concerning repurchase or recourse arrangements. . . . “)