4 Best Practices When Purchasing Participation Loans

In a low interest rate environment, lending is critical. Although only 6% of credit unions hold participation loans, participation loans have a material impact on those credit unions that utilize them, increasing their loan to share ratios by an average of 2.5% as of the first quarter of 2003. Loan participation is an effective

 
 

n a low interest rate environment, lending is critical. Although only 6% of credit unions hold participation loans, participation loans have a material impact on those credit unions that utilize them, increasing their loan to share ratios by an average of 2.5% as of the first quarter of 2003. Loan participation is an effective way to diversify your loan portfolio and generate higher yields than investments of comparable duration.

In a Callahan &Associates webinar ''Keys to Success in the Loan Participation Market,'' held last Thursday, Chris Oldag, SVP Lending at Patelco Credit Union, and Mark Johnson, EVP at Evangelical Christian Credit Union spoke about purchasing and selling loan participations at the two credit unions most active in the participation market. The following are a few of their organizations' recommended best practices.

  1. Get to know the lead lender very well. By obtaining references from other participants and reviewing complete audits, you may ensure your relationship is a successful one. Ongoing financial analysis of the lead lender is also a good idea.
     
  2. Hire external underwriters or avoid loan types you do not understand if you do not want to utilize outside help. You may also choose to stick to loan types that are similar to your portfolio.
     
  3. Do not take credit risks that you would not take with your own portfolio. Even with insured auto loans, get to know the re-insurer as well as the insurer and make sure you feel comfortable with them.
     
  4. The NCUA stipulates that the lead lender must keep at least 10% of the loan. However, especially when establishing a new relationship with a lender, a participating credit union might want to share the risk equally with a 50/50 split.

Best practices may vary as each credit union has different skill sets and different needs, but overall, make sure you are comfortable with the course your participation loan is taking.

 

 

 

July 28, 2003


Comments

 
 
 
  • Very interesting.Explained a lot I did not know about credit unions
    Anonymous
     
     
     
  • I've done participation loans since the end of '98. The key point that you have missed is due diligence that the buying credit union should do on the portfolio they're buying into. In addition a review of the selling credit unions financials, available on this site will give you a good feeling as to the operation and safety and soundness of the credit union you are doing business with. We sell all our loans with full recourse. Basically the buying credit union is assuming a share of the interest rate risk and extension risk in the portfolio for a predetermined discounted percentage of the interest collected. Thanks for writing the article. Gerd Henjes, Pres./CEO Countryside FCU
    Anonymous