A properly managed and risk-focused loan participation
program can increase asset yields, improve earnings, generate
additional loan growth, reduce risk by diversifying the loan
portfolio and assist with balance sheet management. For the
loan originator, the sale of loan participations can enhance
liquidity and provide for increased funding for business and
member-focused products and services.
Before beginning a loan participation program, here are the
basics every credit union needs to understand.
Key Elements of a Sound Loan Participation Program
A loan participation is a loan where one or more eligible
organizations share the risk associated with the loan
by purchasing a portion of the loan from the originating or
As with all loans, proper and thorough due diligence is critical.
Due diligence begins by thoroughly addressing your loan
participation policy, agreements and your risk assessment and
Section 701.22(b)(5) of NCUA’s rules, which discusses loan
participations, requires you to establish a written loan
participation policy. The policy must include loan
underwriting standards and due diligence expectations
tailored to your risk comfort level. This means you, not the
originating credit union, should determine acceptable credit
standards, collateral requirements, loan types, documentation
expectations, servicing arrangements and aggregate- and
single-borrower participation limits.
Individual credit unions are expected to evaluate the
originating credit union’s financial condition and loan
performance record. Your due diligence review must be
independent of the originating credit union, though it may be
outsourced to a qualified third party.
You should conduct and document your own credit and risk
analysis. Relying solely on the credit memos of the lead lender
or using outdated financial and collateral valuations are not
sound business practices. Ultimately, your institution assumes
the risk associated with these products. Therefore, any
decision to engage in a loan participation deserves the same
consideration in evaluating risk as other loans and should
meet your credit standards.
Section 701.22 of NCUA’s rules also requires all loan participations be supported by a written agreement between
the participants. The agreement must include:
- Specific loan information such as participants and amounts,
- Information on the interest portion retained by the
- The location and custodian for the original loan documents,
- Conditions necessary to gain access to financial and other
- Information on the borrower and the servicer, and
- Information on the duties and responsibilities of the parties
involved in the participation.
Finally, prior to execution, your credit union’s independent
counsel should review your loan participation agreement.
Loan participations require ongoing risk monitoring and risk
management appropriate for the type and level of risk the
loan poses to the credit union. As with all loans, credit unions
should perform regular reviews of the financial condition,
business environment and operations of the borrower and
principals involved. In addition, you should work closely with
the originating or lead lender, and request any information
necessary to remain fully informed of the risk associated with
In sum, loan participations offer an attractive opportunity to
boost your loan volume, diversify risk and enhance your
earnings. However, you need to be comfortable that the loan
originator is able to manage the risk associated with the loan
transaction in a way that aligns with your institution’s credit
standards. Thorough due diligence, at a participation loan’s
inception and active oversight throughout the life of the loan,
along with a comprehensive participation agreement, will
ensure you meet the goals of your program and the strategic
goals of your credit union.
View Interactive Version