Rules & Regulations

Section 2.        Loans

Participation Loans

Alabama law does not directly address participation loans. Section 5-17-4(a) of the Alabama Code, which lists powers of credit unions, only authorizes credit unions to make loans to:

(l)      Members

(2)     Other credit unions

(3)     A cooperative society or other organizations having membership in the credit union.

Therefore, an Alabama state chartered credit union may not purchase a loan from another credit union according to this section unless the loan was made to an individual, group of individuals or organization which is a member of the purchasing credit union. However, part (b) of Section 5-17-4 expands the powers of Alabama credit unions to engage in activities in which they could engage if they were operating as a federally chartered credit union. Section 107 of Title I of the Federal Credit Union Act authorizes federal credit unions to participate with other credit unions, credit union organizations or financial organizations in making loans to credit union members in accordance with the following:

“Participation loans with other credit unions, credit union organizations, or financial organizations shall be in accordance with written policies of the board of directors. Provided, that a credit union which originates a loan for which participation arrangements are made in accordance with this subsection shall retain an interest of at least 10 percentum of the face amount of the loan.”

Alabama state chartered credit unions may engage in participation loans in accordance with the above conditions and subject to the following restrictions:

 (1)        Prior written permission must be obtained from the Administrator, Alabama Credit Union Administration for credit unions to extend participation loans among credit unions and between credit unions and other financial organizations.

(2)        The originating credit union may only make loans to its own members.

(3)        All participation loans are to be sold without recourse to the originating credit union.

(4)        The originating credit union will service the loan: it may charge the purchasing credit union a reasonable service fee, but all loan payments, principal and interest, will be equally prorated among the participants in proportion to their ownership interest in the loans: and,

(5)        A credit union may sell loan participations to any financial organization, but a credit union may not purchase a participation in a loan originated by any financial organization other than another credit union.

back