When you think about it, loan participations are credit unions at their finest. After all, by its very definition loan participations involve several financial institutions sharing the risk of lending by pooling funds to provide loans to consumers. There is also the potential for the credit unions involved to realize substantial rewards with current yields. For a number of reasons, however, many credit unions are unaware about the many potential benefits of working with a loan participation program, such as:
- Providing geographic diversity within your portfolio
- Expanding your business loan portfolio without having to originate the loans
- Assisting you in managing concentrations by selling participations
- In most cases, participations do not count against your MBL cap
However, loan participations are also quite challenging. This type of loan is deeply complex and scrutinized heavily by regulatory agencies. The key to success in loan participations for credit unions is to answer several key questions. These include:
- Does our credit union want to get into the loan participation business?
- Do participation loans fit within our existing credit union lending policy, culture and brand?
- Does our credit union have the internal expertise, manpower and resources to handle a participation loan program?
The first two questions can be answered relatively easily. It’s pretty much a straight up yes/no answer. The third question requires deeper thought as you honestly answer challenging questions. While the potential rewards of participation lending are certainly appealing, is your credit union ready to tackle the challenge? As mentioned above, participation lending requires a calculated approach from lending experts with specialized training and expertise in the specific type of loan. Participation loans also demand consistent oversight as marketplace fluctuations impact credit risk evolution over the term of the loan.
Other options for credit unions to ponder include:
- Is our credit union more interested in buying participation loans?
- Is our credit union more interested in selling participation loans?
- Is our credit union interested in purchasing full loans?
- Is our credit union interested and prepared to be the lead lender on a larger loan?
Credit unions that elect to tackle participation lending have the potential to greatly expand their business loan portfolio without having to originate loans, either with participations or loan purchases. A qualified third-party vendor that brings loan participation expertise to the table can enable your credit union to more efficiently pursue such a program as well as providing enhanced geographic diversity within your business portfolio.
In most cases, credit unions interested in pursuing a loan participation program are better advised to pursue a relationship with a qualified third-party vendor expert in the specific type of loan. In addition to gaining third-party experience, this can also provide more participation opportunities.Member Business Lending (MBL) offers a suite of participation loan services uniquely tailored to meet the individual needs of credit unions and their marketplaces. For more information on how your credit union can benefit from loan participations, contact Ryan Bergevin at email@example.com or (801) 545-7934.