§ 4745. — Terms of participation agreements.
[Laws in effect as of January 24, 2002]
[Document not affected by Public Laws enacted between
January 24, 2002 and December 19, 2002]
[CITE: 12USC4745]
TITLE 12--BANKS AND BANKING
CHAPTER 47--COMMUNITY DEVELOPMENT BANKING
SUBCHAPTER II--SMALL BUSINESS CAPITAL ENHANCEMENT
Sec. 4745. Terms of participation agreements
(a) In general
The participation agreement to be entered into by a participating
State and a participating financial institution shall include all
provisions required by this section, and shall not include any
provisions inconsistent with the provisions of this section.
(b) Establishment of separate reserve funds
A separate reserve fund shall be established by the participating
State for each participating financial institution. All funds credited
to a reserve fund shall be the exclusive property of the participating
State. Each reserve fund shall be an administrative account for the
purposes of--
(1) receiving all required premium charges to be paid by the
borrower and participating financial institution and contributions
by the participating State; and
(2) disbursing funds, either to cover losses sustained by the
participating financial institution in connection with loans made
under the Program, or as contemplated by subsections (d) and (r) of
this section.
(c) Investment authority
Subject to applicable State law, the participating State may invest,
or cause to be invested, funds held in a reserve fund by establishing a
deposit account at the participating financial institution in the name
of the participating State. In the event that funds in the reserve fund
are not deposited in such an account, such funds shall be invested in a
form that the participating State determines is safe and liquid.
(d) Earned income and interest
Interest or income earned on the funds credited to a reserve fund
shall be deemed to be part of the reserve fund, except that a
participating State may, as further specified in the participation
agreement, provide authority for the participating State to withdraw
some or all of such interest or income earned.
(e) Loan terms and conditions
(1) In general
A loan to be filed for enrollment under the Program may be made
with such interest rate, fees, and other terms and conditions as
agreed upon by the participating financial institution and the
borrower, consistent with applicable law.
(2) Lines of credit
If a loan to be filed for enrollment is in the form of a line of
credit, the amount of the loan shall be considered to be the maximum
amount that can be drawn by the borrower against the line of credit.
(f) Enrollment process
(1) Filing
(A) In general
A participating financial institution shall file each loan
made under the Program for enrollment by completing and
submitting to the participating State a form prescribed by the
participating State.
(B) Form
The form referred to in subparagraph (A) shall include a
representation by the participating financial institution that
it has complied with the participation agreement in enrolling
the loan with the State.
(C) Premium charges
Accompanying the completed form shall be the nonrefundable
premium charges paid by the borrower and the participating
financial institution, or evidence that such premium charges
have been deposited into the deposit account containing the
reserve fund, if applicable.
(D) Submission
The participation agreement shall require that the items
required by this subsection shall be submitted to the
participating State by the participating financial institutions
not later than 10 calendar days after a loan is made.
(2) Enrollment by State
Upon receipt by the participating State of the filing submitted
in accordance with paragraph (1), the participating State shall
promptly enroll the loan and make a matching contribution to the
reserve fund in accordance with subsection (j) of this section,
unless the information submitted indicates that the participating
financial institution has not complied with the participation
agreement in enrolling the loan.
(g) Coverage amount
In filing a loan for enrollment under the Program, the participating
financial institution may specify an amount to be covered under the
Program that is less than the full amount of the loan.
(h) Premium charges
(1) Minimum and maximum amounts
The premium charges payable to the reserve fund by the borrower
and the participating financial institution shall be prescribed by
the participating financial institution, within minimum and maximum
limits set forth in the participation agreement. The participation
agreement shall establish minimum and maximum limits whereby the sum
of the premium charges paid in connection with a loan by the
borrower and the participating financial institution is not less
than 3 percent nor more than 7 percent of the amount of the loan
covered under the Program.
(2) Allocation of premium charges
The participation agreement shall specify terms for allocating
premium charges between the borrower and the participating financial
institution. However, if the participating financial institution is
required to pay any of the premium charges, the participation
agreement shall authorize the participating financial institution to
recover from the borrower the cost of the payment of the
participating financial institution, in any manner on which the
participating financial institution and the borrower agree.
(i) Restrictions
(1) Actions prohibited
Except as provided in subsection (h) of this section and
paragraph (2) of this subsection, the participating State may not--
(A) impose any restrictions or requirements, relating to the
interest rate, fees, collateral, or other business terms and
conditions of the loan; or
(B) condition enrollment of a loan in the Program on the
review by the State of the risk or creditworthiness of a loan.
(2) Effect on other law
Nothing in this subchapter shall affect the applicability of any
other law to the conduct by a participating financial institution of
its business.
(j) State contributions
In enrolling a loan under the Program, the participating State shall
contribute to the reserve fund an amount, as provided for in the
participation agreement, which shall not be less than the sum of the
amount of premium charges paid by the borrower and the participating
financial institution.
(k) Submission of claims
(1) Filing
If a participating financial institution charges off all or part
of an enrolled loan, such participating financial institution may
file a claim for reimbursement with the participating State by
submitting a form that--
(A) includes the representation by the participating
financial institution that it is filing the claim in accordance
with the terms of the applicable participation agreement; and
(B) contains such other information as may be required by
the participating State.
(2) Timing
Any claim filed under paragraph (1) shall be filed
contemporaneously with the action of the participating financial
institution to charge off all or part of an enrolled loan. The
participating financial institution shall determine when and how
much to charge off on an enrolled loan, in a manner consistent with
its usual method for making such determinations on business loans
that are not enrolled loans under this subchapter.
(l) Elements of claims
A claim filed by a participating financial institution may include
the amount of principal charged off, not to exceed the covered amount of
the loan. Such claim may also include accrued interest and out-of-pocket
expenses, if and to the extent provided for under the participation
agreement.
(m) Payment of claims
(1) In general
Except as provided in subsection (n) of this section and
paragraph (2) of this subsection, upon receipt of a claim filed in
accordance with this section and the participation agreement, the
participating State shall promptly pay to the participating
financial institution, from funds in the reserve fund, the full
amount of the claim as submitted.
(2) Insufficient reserve funds
If there are insufficient funds in the reserve fund to cover the
entire amount of a claim of a participating financial institution,
the participating State shall pay to the participating financial
institution an amount equal to the current balance in the reserve
fund. If the enrolled loan for which the claim has been filed--
(A) is not an early loan, such payment shall be deemed fully
to satisfy the claim, and the participating financial
institution shall have no other or further right to receive any
amount from the reserve fund with respect to such claim; or
(B) is an early loan, such payment shall not be deemed fully
to satisfy the claim of the participating financial institution,
and at such time as the remaining balance of the claim does not
exceed 75 percent of the balance in the reserve fund, the
participating State shall, upon the request of the participating
financial institution, pay any remaining amount of the claim.
(n) Denial of claims
A participating State may deny a claim if a representation or
warranty made by the participating financial institution to the
participating State at the time that the loan was filed for enrollment
or at the time that the claim was submitted was known by the
participating financial institution to be false.
(o) Subsequent recovery of claim amount
If, subsequent to payment of a claim by the participating State, a
participating financial institution recovers from a borrower any amount
for which payment of the claim was made, the participating financial
institution shall promptly pay to the participating State for deposit
into the reserve fund the amount recovered, less any expenses incurred
by the institution in collection of such amount.
(p) Participation agreement terms
(1) In general
In connection with the filing of a loan for enrollment in the
Program, the participation agreement--
(A) shall require the participating financial institution to
obtain an assurance from each borrower that--
(i) the proceeds of the loan will be used for a business
purpose;
(ii) the loan will not be used to finance passive real
estate ownership; and
(iii) the borrower is not--
(I) an executive officer, director, or principal
shareholder of the participating financial institution;
(II) a member of the immediate family of an
executive officer, director, or principal shareholder of
the participating financial institution; or
(III) a related interest of any such executive
officer, director, principal shareholder, or member of
the immediate family;
(B) shall require the participating financial institution to
provide assurances to the participating State that the loan has
not been made in order to place under the protection of the
Program prior debt that is not covered under the Program and
that is or was owed by the borrower to the participating
financial institution or to an affiliate of the participating
financial institution;
(C) may provide that if--
(i) a participating financial institution makes a loan
to a borrower that is a refinancing of a loan previously
made to the borrower by the participating financial
institution or an affiliate of the participating financial
institution;
(ii) such prior loan was not enrolled in the Program;
and
(iii) additional or new financing is extended by the
participating financial institution as part of the
refinancing,
the participating financial institution may file the loan for
enrollment, with the amount to be covered under the Program not
to exceed the amount of any additional or new financing; and
(D) may include additional restrictions on the eligibility
of loans or borrowers that are not inconsistent with the
provisions and purposes of this subchapter.
(2) Definitions
For purposes of this subsection, the terms ``executive
officer'', ``director'', ``principal shareholder'', ``immediate
family'', and ``related interest'' refer to the same relationship to
a participating financial institution as the relationship described
in part 215 of title 12 of the Code of Federal Regulations, or any
successor to such part.
(q) Termination clause
In each participation agreement, the participating State shall
reserve for itself the ability to terminate its obligation to enroll
loans under the Program. Any such termination shall be prospective only,
and shall not apply to amounts of loans enrolled under the Program prior
to such termination.
(r) Allowable withdrawals from fund
The participation agreement may provide that, if, for any
consecutive period of not less than 24 months, the aggregate outstanding
balance of all enrolled loans for a participating financial institution
is continually less than the outstanding balance in the reserve fund for
that participating financial institution, the participating State, in
its discretion, may withdraw an amount from the reserve fund to bring
the balance in the reserve fund down to the outstanding balance of all
such enrolled loans.
(s) Grandfathered provision
(1) Special treatment of premium charges
Notwithstanding subsection (b) or (d) of this section, the
participation agreement, if explicitly authorized by a statute
enacted by the State before September 23, 1994, may allow a
participating financial institution to treat the premium charges
paid by the participating financial institution and the borrower
into the reserve fund, and interest or income earned on funds in the
reserve fund that are deemed to be attributable to such premium
charges, as assets of the participating financial institution for
accounting purposes, subject to withdrawal by the participating
financial institution only--
(A) for the payment of claims approved by the participating
State in accordance with this section; and
(B) upon the participating financial institution's
withdrawal from authority to make new loans under the Program.
(2) Payment of post-withdrawal claims
After any withdrawal of assets from the reserve fund pursuant to
paragraph (1)(B), any future claims filed by the participating
financial institution on loans remaining in its capital access
program portfolio shall only be paid from funds remaining in the
reserve fund to the extent that, in the aggregate, such claims
exceed the sum of the amount of such withdrawn assets, and interest
on that amount, imputed at the same rate as income would have
accrued had the amount not been withdrawn.
(3) Conditions for terminating special authority
If the Fund determines that the inclusion in a participation
agreement of the provisions authorized by this subsection is
resulting in the enrollment of loans under the Program that are
likely to have been made without assistance provided under this
subchapter, the Fund may notify the participating State that
henceforth, the Fund will only make reimbursements to the State
under section 4747 of this title with respect to a loan if the
participation agreement between the participating State and each
participating financial institution has been amended to conform with
this section, without exercise of the special authority granted by
this subsection.
(Pub. L. 103-325, title II, Sec. 255, Sept. 23, 1994, 108 Stat. 2207.)
Section Referred to in Other Sections
This section is referred to in sections 4743, 4748 of this title.
