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Our bank purchases receivables through a service offered by our core processor. We have an opportunity to purchase a large number of receivables from a single company, and we would like another financial institution to share the risk for this transaction. Can we enter into a participation agreement with a credit union, rather than a bank? We are considering a credit union located out of state.

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We are not aware of any state or federal law that would prohibit a bank from selling a loan participation interest to a credit union.

Illinois state-chartered banks have the general authority for “buying and selling exchange and doing a general banking business.” Buying and selling loan participation interests are commonplace and universally viewed to be incidental and germane to the general banking business.

Illinois state-chartered banks also have the authority “to do any act” that is permitted for national banks. The OCC has expressly recognized that national banks have the authority to purchase participation interests as part of their general lending powers, and implicit in this authority is the recognition that national banks also may sell loan participation interests, since the selling counterparties often are national banks.

We are not aware of any legal restrictions with respect to the type of purchaser of a loan participation interest in the context raised here. In fact, the FDIC’s rules for the Community Reinvestment Act encourage banks to participate in loans with certain (low-income) credit unions.

While we do not expect your bank to encounter any unique issues in the contemplated transaction, we would recommend that you require the out-of-state credit union to warrant in the participation agreement that it has the authority to engage in the loan participation under its applicable enabling laws.

For resources related to our guidance, please see:

  • Illinois Banking Act, 205 ILCS 5/5(3)  (“It shall be lawful to form banks . . . for the purpose of discount and deposit, buying and selling exchange and doing a general banking business . . . .”)

  • Illinois Administrative Code, 38 Ill. Adm. Code 320.30  (“Factors to be Considered. (a)  The following factors are relevant, if applicable, in determining whether an activity is incidental and germane to carrying on a general banking business . . . . (2) Is the activity related to ordinary, traditional bank functions (i.e., lending money, paying checks and accepting deposits)?  (3) To what extent do other banks participate in this activity?”)

  • Illinois Banking Act, 205 ILCS 5/5(11)  (An Illinois state-chartered bank has the authority “to do any act . . . that is at the time authorized or permitted to national banks . . . .”)

  • OCC Interpretive Letter No. 579 (March 24, 1992), CCH ¶ 83,349 (subscription required)

  • FDIC’S CRA Regulations, 12 CFR 345.21(f) (“In assessing and taking into account the record of a nonminority-owned and nonwomen-owned bank under this part, the FDIC considers as a factor capital investment, loan participation, and other ventures undertaken by the bank in cooperation with minority- and women-owned financial institutions and low-income credit unions.”)