New Fight Breaks Out Over Loan Participations

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CLEVELAND – In another of a growing number of disputes over participation lending, NCUA filed suit in federal court here yesterday contesting ownership of a $11 million participated loan that belonged to the year’s biggest credit union failure, St. Paul’s Croatian FCU, a one-time $250 million credit union shuttered in May.

Another Ohio credit union, LorMet Community FCU, which bought a 90% participation in the loan, claims it now owns the whole loan because of a clause in the participation agreement that gives it right to the whole loan if the seller becomes insolvent or is taken over by the regulator and the new owner fails to cure the loan within 30 days.

NCUA claims that the U.S. Code of Federal Regulations gives the agency as liquidator of St. Paul’s Croatian, to disallow claims such as LorMet Community’s.

Several other legal disputes have broken out recently over loan participations, including one last month over participations bought from failed Eastern Financial Florida CU, and recent fights over speculative real estate loans sold by Norlarco CU, participations sold by failed Cal State 9 CU, and shares in subprime auto loans sold by Centrix Financial.

Several federal courts have demurred to NCUA in recent cases in which the federal regulator is disputing authority over the carcasses of failed credit unions.

The failure of St. Paul’s Croatian FCU was a strange one, with NCUA taking over the 67-year-old Croatian immigrant credit union May 1, then liquidating it less than a week later. NCUA would only say the move came amid record keeping shortfalls and a rapid deterioration of the credit union's financial condition, even though the credit union's financial show a solid $5.4-million net for 2009 and a $1.4-million net for the first quarter of 2010 and 13% net worth.

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