---
kind: "section"
citation: "12 U.S.C. § 4745"
title: "12"
title_heading: "Banks and Banking"
number: "4745"
heading: "Terms of participation agreements"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/12/4745"
units:
  - "Chapter 47 — Community Development Banking"
  - "Subchapter II — Small Business Capital Enhancement"
---

# §4745. Terms of participation agreements

- (a) **In general—** The participation agreement to be entered into by a [participating State](/usc/12/4742.md?p=7) and a [participating financial institution](/usc/12/4742.md?p=6) 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](/usc/12/4742.md?p=10) shall be established by the [participating State](/usc/12/4742.md?p=7) for each [participating financial institution](/usc/12/4742.md?p=6). All [funds](/usc/12/4702.md?p=10) credited to a [reserve fund](/usc/12/4742.md?p=10) shall be the exclusive property of the [participating State](/usc/12/4742.md?p=7). Each [reserve fund](/usc/12/4742.md?p=10) 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](/usc/12/4742.md?p=6) and contributions by the [participating State](/usc/12/4742.md?p=7); and
  - (2) disbursing [funds](/usc/12/4702.md?p=10), either to cover losses sustained by the [participating financial institution](/usc/12/4742.md?p=6) in connection with loans made under the [Program](/usc/12/4742.md?p=9), or as contemplated by subsections [(d)](#d) and [(r)](#r).
- (c) **Investment authority—** Subject to applicable [State](/usc/12/4702.md?p=18) law, the [participating State](/usc/12/4742.md?p=7) may [invest](/usc/12/1861.md?p=b-6), or cause to be invested, [funds](/usc/12/4702.md?p=10) held in a [reserve fund](/usc/12/4742.md?p=10) by establishing a deposit account at the [participating financial institution](/usc/12/4742.md?p=6) in the name of the [participating State](/usc/12/4742.md?p=7). In the event that [funds](/usc/12/4702.md?p=10) in the [reserve fund](/usc/12/4742.md?p=10) are not deposited in such an account, such [funds](/usc/12/4702.md?p=10) shall be invested in a form that the [participating State](/usc/12/4742.md?p=7) determines is safe and liquid.
- (d) **Earned income and interest—** Interest or income earned on the [funds](/usc/12/4702.md?p=10) credited to a [reserve fund](/usc/12/4742.md?p=10) shall be deemed to be part of the [reserve fund](/usc/12/4742.md?p=10), except that a [participating State](/usc/12/4742.md?p=7) may, as further specified in the participation agreement, provide authority for the [participating State](/usc/12/4742.md?p=7) 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](/usc/12/4742.md?p=9) may be made with such interest rate, fees, and other terms and conditions as agreed upon by the [participating financial institution](/usc/12/4742.md?p=6) 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](/usc/12/5481.md?p=7), 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](/usc/12/5481.md?p=7).
- (f) **Enrollment process—**
  - (1) **Filing—**
    - (A) **In general—** A [participating financial institution](/usc/12/4742.md?p=6) shall file each loan made under the [Program](/usc/12/4742.md?p=9) for enrollment by completing and submitting to the [participating State](/usc/12/4742.md?p=7) a form prescribed by the [participating State](/usc/12/4742.md?p=7).
    - (B) **Form—** The form referred to in [subparagraph (A)](#f-1-A) shall include a representation by the [participating financial institution](/usc/12/4742.md?p=6) that it has complied with the participation agreement in enrolling the loan with the [State](/usc/12/4702.md?p=18).
    - (C) **Premium charges—** Accompanying the completed form shall be the nonrefundable premium charges paid by the borrower and the [participating financial institution](/usc/12/4742.md?p=6), or evidence that such premium charges have been deposited into the deposit account containing the [reserve fund](/usc/12/4742.md?p=10), if applicable.
    - (D) **Submission—** The participation agreement shall require that the items required by this subsection shall be submitted to the [participating State](/usc/12/4742.md?p=7) by the [participating financial institutions](/usc/12/4742.md?p=6) not later than 10 calendar days after a loan is made.
  - (2) **Enrollment by State—** Upon receipt by the [participating State](/usc/12/4742.md?p=7) of the filing submitted in accordance with [paragraph (1)](#f-1), the [participating State](/usc/12/4742.md?p=7) shall promptly enroll the loan and make a matching contribution to the [reserve fund](/usc/12/4742.md?p=10) in accordance with [subsection (j)](#j), unless the information submitted indicates that the [participating financial institution](/usc/12/4742.md?p=6) has not complied with the participation agreement in enrolling the loan.
- (g) **Coverage amount—** In filing a loan for enrollment under the [Program](/usc/12/4742.md?p=9), the [participating financial institution](/usc/12/4742.md?p=6) may specify an amount to be covered under the [Program](/usc/12/4742.md?p=9) 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](/usc/12/4742.md?p=10) by the borrower and the [participating financial institution](/usc/12/4742.md?p=6) shall be prescribed by the [participating financial institution](/usc/12/4742.md?p=6), 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](/usc/12/4742.md?p=6) is not less than 3 percent nor more than 7 percent of the amount of the loan covered under the [Program](/usc/12/4742.md?p=9).
  - (2) **Allocation of premium charges—** The participation agreement shall specify terms for allocating premium charges between the borrower and the [participating financial institution](/usc/12/4742.md?p=6). However, if the [participating financial institution](/usc/12/4742.md?p=6) is required to pay any of the premium charges, the participation agreement shall authorize the [participating financial institution](/usc/12/4742.md?p=6) to recover from the borrower the cost of the payment of the [participating financial institution](/usc/12/4742.md?p=6), in any manner on which the [participating financial institution](/usc/12/4742.md?p=6) and the borrower agree.
- (i) **Restrictions—**
  - (1) **Actions prohibited—** Except as provided in [subsection (h)](#h) and paragraph (2) of this subsection, the [participating State](/usc/12/4742.md?p=7) 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](/usc/12/4742.md?p=9) on the review by the [State](/usc/12/4702.md?p=18) 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](/usc/12/4742.md?p=6) of its business.
- (j) **State contributions—** In enrolling a loan under the [Program](/usc/12/4742.md?p=9), the [participating State](/usc/12/4742.md?p=7) shall contribute to the [reserve fund](/usc/12/4742.md?p=10) 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](/usc/12/4742.md?p=6).
- (k) **Submission of claims—**
  - (1) **Filing—** If a [participating financial institution](/usc/12/4742.md?p=6) charges off all or part of an [enrolled loan](/usc/12/4742.md?p=4), such [participating financial institution](/usc/12/4742.md?p=6) may file a claim for reimbursement with the [participating State](/usc/12/4742.md?p=7) by submitting a form that—
    - (A) includes the representation by the [participating financial institution](/usc/12/4742.md?p=6) 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](/usc/12/4742.md?p=7).
  - (2) **Timing—** Any claim filed under [paragraph (1)](#k-1) shall be filed contemporaneously with the action of the [participating financial institution](/usc/12/4742.md?p=6) to charge off all or part of an [enrolled loan](/usc/12/4742.md?p=4). The [participating financial institution](/usc/12/4742.md?p=6) shall determine when and how much to charge off on an [enrolled loan](/usc/12/4742.md?p=4), in a manner consistent with its usual method for making such determinations on business loans that are not [enrolled loans](/usc/12/4742.md?p=4) under this subchapter.
- (l) **Elements of claims—** A claim filed by a [participating financial institution](/usc/12/4742.md?p=6) 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)](#n) and paragraph (2) of this subsection, upon receipt of a claim filed in accordance with this section and the participation agreement, the [participating State](/usc/12/4742.md?p=7) shall promptly pay to the [participating financial institution](/usc/12/4742.md?p=6), from [funds](/usc/12/4702.md?p=10) in the [reserve fund](/usc/12/4742.md?p=10), the full amount of the claim as submitted.
  - (2) **Insufficient reserve funds—** If there are insufficient [funds](/usc/12/4702.md?p=10) in the [reserve fund](/usc/12/4742.md?p=10) to cover the entire amount of a claim of a [participating financial institution](/usc/12/4742.md?p=6), the [participating State](/usc/12/4742.md?p=7) shall pay to the [participating financial institution](/usc/12/4742.md?p=6) an amount equal to the current balance in the [reserve fund](/usc/12/4742.md?p=10). If the [enrolled loan](/usc/12/4742.md?p=4) for which the claim has been filed—
    - (A) is not an [early loan](/usc/12/4742.md?p=3), such payment shall be deemed fully to satisfy the claim, and the [participating financial institution](/usc/12/4742.md?p=6) shall have no other or further right to receive any amount from the [reserve fund](/usc/12/4742.md?p=10) with respect to such claim; or
    - (B) is an [early loan](/usc/12/4742.md?p=3), such payment shall not be deemed fully to satisfy the claim of the [participating financial institution](/usc/12/4742.md?p=6), and at such time as the remaining balance of the claim does not exceed 75 percent of the balance in the [reserve fund](/usc/12/4742.md?p=10), the [participating State](/usc/12/4742.md?p=7) shall, upon the request of the [participating financial institution](/usc/12/4742.md?p=6), pay any remaining amount of the claim.
- (n) **Denial of claims—** A [participating State](/usc/12/4742.md?p=7) may deny a claim if a representation or warranty made by the [participating financial institution](/usc/12/4742.md?p=6) to the [participating State](/usc/12/4742.md?p=7) 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](/usc/12/4742.md?p=6) to be false.
- (o) **Subsequent recovery of claim amount—** If, subsequent to payment of a claim by the [participating State](/usc/12/4742.md?p=7), a [participating financial institution](/usc/12/4742.md?p=6) recovers from a borrower any amount for which payment of the claim was made, the [participating financial institution](/usc/12/4742.md?p=6) shall promptly pay to the [participating State](/usc/12/4742.md?p=7) for deposit into the [reserve fund](/usc/12/4742.md?p=10) 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](/usc/12/4742.md?p=9), the participation agreement—
    - (A) shall require the [participating financial institution](/usc/12/4742.md?p=6) 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](/usc/12/4742.md?p=8); and
      - (iii) the borrower is not—
        - (I) an executive officer, [director](/usc/12/5481.md?p=10), or principal shareholder of the [participating financial institution](/usc/12/4742.md?p=6);
        - (II) a member of the immediate family of an executive officer, [director](/usc/12/5481.md?p=10), or principal shareholder of the [participating financial institution](/usc/12/4742.md?p=6); or
        - (III) a related interest of any such executive officer, [director](/usc/12/5481.md?p=10), principal shareholder, or member of the immediate family;
    - (B) shall require the [participating financial institution](/usc/12/4742.md?p=6) to provide assurances to the [participating State](/usc/12/4742.md?p=7) that the loan has not been made in order to place under the protection of the [Program](/usc/12/4742.md?p=9) prior debt that is not covered under the [Program](/usc/12/4742.md?p=9) and that is or was owed by the borrower to the [participating financial institution](/usc/12/4742.md?p=6) or to an [affiliate](/usc/12/4702.md?p=3) of the [participating financial institution](/usc/12/4742.md?p=6);
    - (C) may provide that if—
      - (i) a [participating financial institution](/usc/12/4742.md?p=6) makes a loan to a borrower that is a refinancing of a loan previously made to the borrower by the [participating financial institution](/usc/12/4742.md?p=6) or an [affiliate](/usc/12/4702.md?p=3) of the [participating financial institution](/usc/12/4742.md?p=6);
      - (ii) such prior loan was not enrolled in the [Program](/usc/12/4742.md?p=9); and
      - (iii) additional or new financing is extended by the [participating financial institution](/usc/12/4742.md?p=6) as part of the refinancing,

      the [participating financial institution](/usc/12/4742.md?p=6) may file the loan for enrollment, with the amount to be covered under the [Program](/usc/12/4742.md?p=9) 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](/usc/12/5481.md?p=10)”, “principal shareholder”, “immediate family”, and “related interest” refer to the same relationship to a [participating financial institution](/usc/12/4742.md?p=6) as the relationship described in part [215](/usc/12/215.md) 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](/usc/12/4742.md?p=7) shall reserve for itself the ability to terminate its obligation to enroll loans under the [Program](/usc/12/4742.md?p=9). Any such termination shall be prospective only, and shall not apply to amounts of loans enrolled under the [Program](/usc/12/4742.md?p=9) 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](/usc/12/4742.md?p=4) for a [participating financial institution](/usc/12/4742.md?p=6) is continually less than the outstanding balance in the [reserve fund](/usc/12/4742.md?p=10) for that [participating financial institution](/usc/12/4742.md?p=6), the [participating State](/usc/12/4742.md?p=7), in its discretion, may withdraw an amount from the [reserve fund](/usc/12/4742.md?p=10) to bring the balance in the [reserve fund](/usc/12/4742.md?p=10) down to the outstanding balance of all such [enrolled loans](/usc/12/4742.md?p=4).
- (s) **Grandfathered provision—**
  - (1) **Special treatment of premium charges—** Notwithstanding subsection [(b)](#b) or [(d)](#d), the participation agreement, if explicitly authorized by a statute enacted by the [State](/usc/12/4702.md?p=18) before September 23, 1994, may allow a [participating financial institution](/usc/12/4742.md?p=6) to treat the premium charges paid by the [participating financial institution](/usc/12/4742.md?p=6) and the borrower into the [reserve fund](/usc/12/4742.md?p=10), and interest or income earned on [funds](/usc/12/4702.md?p=10) in the [reserve fund](/usc/12/4742.md?p=10) that are deemed to be attributable to such premium charges, as assets of the [participating financial institution](/usc/12/4742.md?p=6) for accounting purposes, subject to withdrawal by the [participating financial institution](/usc/12/4742.md?p=6) only—
    - (A) for the payment of claims approved by the [participating State](/usc/12/4742.md?p=7) in accordance with this section; and
    - (B) upon the [participating financial institution](/usc/12/4742.md?p=6)’s withdrawal from authority to make new loans under the [Program](/usc/12/4742.md?p=9).
  - (2) **Payment of post-withdrawal claims—** After any withdrawal of assets from the [reserve fund](/usc/12/4742.md?p=10) pursuant to [paragraph (1)(B)](#s-1-B), any future claims filed by the [participating financial institution](/usc/12/4742.md?p=6) on loans remaining in its capital access [program](/usc/12/4742.md?p=9) portfolio shall only be paid from [funds](/usc/12/4702.md?p=10) remaining in the [reserve fund](/usc/12/4742.md?p=10) 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](/usc/12/4702.md?p=10) 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](/usc/12/4742.md?p=9) that are likely to have been made without assistance provided under this subchapter, the [Fund](/usc/12/4702.md?p=10) may notify the [participating State](/usc/12/4742.md?p=7) that henceforth, the [Fund](/usc/12/4702.md?p=10) will only make reimbursements to the [State](/usc/12/4702.md?p=18) under [section 4747 of this title](/usc/12/4747.md) with respect to a loan if the participation agreement between the [participating State](/usc/12/4742.md?p=7) and each [participating financial institution](/usc/12/4742.md?p=6) has been amended to conform with this section, without exercise of the special authority granted by this subsection.

## Source credit

(Pub. L. 103–325, title II, § 255, Sept. 23, 1994, 108 Stat. 2207.)