§4745 Terms of Participation Agreements

Summary

A state that joins the program must make a written agreement with each bank that follows these rules and does not conflict with them. The state must set up a separate reserve fund for each bank. Money put into a reserve fund belongs to the state. The fund is used to take in required premium payments from borrowers and banks, state contributions, and to pay losses or other allowed disbursements. Under state law, the state may put the fund in a deposit account at the bank or invest it in something safe and easy to turn into cash. Any interest or earnings usually stay in the reserve fund unless the agreement allows the state to take some or all of that income out. Loans can have interest, fees, and other terms set by the bank and the borrower, as long as the law is followed. For lines of credit, the covered loan amount is the maximum the borrower can draw. The bank must file a form with the state to enroll each loan within 10 calendar days of making the loan. That form must say the bank followed the agreement and must include the nonrefundable premium payments or proof they were deposited. Once the state gets the form, it will enroll the loan and make a matching contribution to the reserve fund unless the form shows the bank did not follow the agreement. The bank may choose to insure less than the whole loan. The total premium charges paid by borrower and bank must be at least 3 percent but no more than 7 percent of the covered loan amount, and the agreement will say how those charges are split. The state may not set rules about interest rates, fees, collateral, or require the state to review a loan’s creditworthiness. The state still must follow other laws that apply. If the bank writes off part or all of an enrolled loan, it can file a claim with the state at the same time it charges off the loan. The claim must say the bank followed the agreement and give any other required details. A claim can ask for principal up to the covered amount and may include interest and out-of-pocket costs if the agreement allows. The state should pay the full approved claim from the reserve fund right away, unless the fund does not have enough money. If funds are short, the state pays the current balance of the fund. For non-early loans, that payment finishes the claim; for early loans, the state may pay more later when the remaining claim is small enough, specifically when it does not exceed 75 percent of the reserve fund balance and the bank asks. The state can deny a claim if the bank knowingly made a false statement when enrolling the loan or filing the claim. If the bank recovers money after the state paid a claim, the bank must return the recovered amount to the reserve fund, minus collection costs. The agreement must get the borrower’s promise that the loan is for a business, not passive real estate, and that the borrower is not an insider of the bank or a close relative or related interest. The agreement must also say the loan is not being used to protect prior debt owed to the bank or its affiliate. The state can reserve the right to stop enrolling new loans in the future; that stop only applies to loans made after the stop. If the total enrolled loan balance stays below the reserve fund balance for at least 24 consecutive months, the state may withdraw enough from the fund to match the outstanding loan balance. If a state had a statute before September 23, 1994 that allowed special accounting treatment of premiums and earnings, the agreement may keep that treatment but limits how and when those amounts can be withdrawn and how future claims are paid. If the Fund finds that such special rules caused loans to be enrolled that would have been made without help, the Fund can require the state to remove the special rules before the Fund will reimburse the state for loans.