Loan participations are a great way for lenders to supplement the organic growth of their loan portfolios as well as diversifying their risk across different geographic regions and industries. However, these transactions are not free of risk. Being aware of the potential pitfalls can help you plan for and mitigate challenges.
While there are many different components of participations to consider, the primary factor for success is accurately matching the quality of loans you purchase with the level of risk that your portfolio can sustain. Put simply, only participate in loans that you would actually make yourself. It may seem convenient to quickly accept a loan package prepared by another lender, but you cannot assume that their underwriting and documentation standards are sufficient.
To determine if a loan meets your internal criteria you should:
- Conduct a thorough review of the loan purpose
- Analyze the credit and repayment resources of the borrower
- Complete a detailed analysis of the value and lien status of collateral
- Review appraisals for regulatory compliance and reasonableness
- Assess collection procedures of the lead lender
- Maintain current borrower credit information for the duration of the loan
- Ensure that participation agreements with originating lenders are comprehensive
Additional strategic objectives that should be recognized when choosing loans to purchase include limiting the amount of loans purchased from a single lender or from a particular industry. While participation loans could add diversity to your portfolio it is still your responsibility to curate a diverse participation portfolio.
While some lenders find loan participations stressful, others rely on them to grow earning assets and diversify risk. The ease of these transactions largely depends on well structured agreements and thorough due diligence. If your institution is interested in buying or selling loans through participation agreements, Lucro’s dedicated team of experts are available to assist with reviewing and brokering loan participations. To learn more, contact Tami Chandler at email@example.com.