NCUA IRPS 85-3 -- Assumption of Real Estate Loans by Nonmembers 1/86

NCUA-IR - 85-3 ASSUMPTION OF REAL ESTATE LOANS BY NONMEMBERS 1/86

NATIONAL CREDIT UNION ADMINISTRATION 12 C.F.R Ch. VII

Assumption of Real Estate Loans by Nonmembers; Interpretive Ruling and Policy Statement 85-3

AGENCY: National Credit Union Administration (NCUA)

ACTION: Interpretive Ruling and Policy Statement 85-3

SUMMARY: Section 107(5)(A)(i) of the Federal Credit Union Act (12 U.S.C 1757(5)(A)(1)) authorizes Federal Credit unions to make long-term residential real estate loans to members on certain stated conditions and subject to rules and regulations of the NCUA Board. The NCUA Board has determined that, in the case of loans made pursuant to this authority, Federal credit unions may authorize a nonmember to assume the outstanding balance and maturity of the loan in conjunction with a purchase of the member's principal residence.

EFFECTIVE DATE: December 12, 1985

FOR FURTHER INFORMATION CONTACT: Steven Bisker, Assistant General Counsel, at the above address, or telephone (202) 357-1030.

SUPPLEMENTARY INFORMATION: Since 1977, FCU's have been empowered, pursuant to section 107(5)(a)(i) of the FCU Act (12 U.S.C. 1757(5)(A)(i)), to offer long-term real estate loans to finance a member's principal residence. NCUA's implementing regulation for this authority is set forth at 12 CFR 701.21.

Staff opinions have previously stated that a long-term real estate loan made to a member could not be assumed by a nonmember unless the member remained personally liable for repayment of the load. This position has, in the view of the board, placed an unwarranted burden on credit union members and, in most cases, precluded the assumability of FCU mortgage loans.

The policy has also placed Federal credit unions at a disadvantage vis-a-vis other mortgage lenders. Historically, lenders other than FCU's have had greater flexibility to either allow assumption of real estate loans on their existing terms and conditions or to use "due-on-sale" clauses or similar devices to either require payment of the load or negotiate an adjustment of the interest rate to reflect current market rates on the remaining outstanding balance for the remaining maturity of the loan. The provisions of Title IV of the Garn-St. Germain Act (Public Law 97-320) recognize these practices as an integral part of mortgage lending.

NCUA has recently had an opportunity to review this policy in response to an inquiry from a private attorney representing Federal credit unions. As a result of that review, the Board has determined that, as a matter that is incidental to the authority of FCU's in section 107(5)(A)(i) of the Act and 701.21 of the Rules and Regulations to make long-term real estate loans to members, FCU's may permit assumptions, by either members or nonmembers, under the terms and conditions specified in the loan agreement and consistent with the Act and Rules and Regulations. This includes the authority to permit a nonmember to assume the mortgage loan without the member remaining primarily liable on the loan. In the case of a nonmember assumption, there must be no new money extended to the borrower and no extension of the original maturity date beyond that specified in the loan agreement with the member.

This Interpretive Ruling is not intended to authorize refinancings by nonmembers. Further, it is not intended to provide the legal justification for an FCU to engage in what the Board would consider a "sham transaction," whereby a member would be involved as the borrower simply to legally support the making of the initial mortgage loan but with the underlying intent of having a nonmember immediately, or soon thereafter, assume the loan. FCU's engaging in such practices will be dealt with through NCUA's administrative enforcement process.

This Interpretive Ruling does not in any way require an FCU to permit nonmember assumption of real estate loans. As provided in 701.21(g)(6) (incorporating regulations issued by the Federal Home Loan Bank Board implementing Section 341 of Pub. L. 97-320), an FCU may, pursuant to the loan agreement, declare the loan immediately due and payable if the member's residence securing the loan is sold. Further, the loan agreement may provide for adjustment of the interest rate on the remaining balance of the loan as a condition of approving the assumption. Lastly, FCU's permitting assumptions should not disregard their customary credit standards in evaluating whether the nonmember is creditworthy.

When a long-term real estate loan is assumed by a nonmember FCU's are advised to make appropriate accounting entries to reflect that the loan is no longer a loan to a member. FCU's are recommended to record such loans in ledger account 711 -- Notes and Contracts Receivable, as described in the Accounting Manual for Federal Credit Unions.

Interpretative Ruling and Policy Statement 85-3

Assumption of Real Estate Loans by Nonmembers

Consistent with its authority to make long-term real estate (mortgage) loans pursuant to section 107(5)(A)(i) of the Federal Credit Union Act (12 U.S.C. 1757(5)(A)(i)) and Section 701.21(g) of the National Credit Union Administration Rules and Regulations (12 CFR 701.21(g)) a Federal credit union may permit a nonmember to assume a member's mortgage loan in conjunction with the purchasing of the member's principal residence. Provided that:

(1) The nonmember assumes only the remaining unpaid balance of the loan (no new money or refinancing);

(2) There is no extension of the original maturity data beyond that specified in the loan agreement with the member

(3) The original loan was not made to the member with the underlying intent of having a nonmember immediately, or soon thereafter, assume the loan;

(4) The terms of the assumption are consistent with the loan agreement and in compliance with the FCU Act, NCUA Rules and Regulations and other applicable law.

By the National Credit Union Administration Board on December 12, 1985.

Rosemary Brady Secretary of the Board

[FR Doc. 85-30152 Files 12-19-85; 8:45 am]

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