Due diligence for loan participation programs: a comprehensive guide
by: Mike Dorsett
In our last post, we discussed the benefits of utilizing participation loans. A loan participation is an instrument that allows multiple lenders to participate or share in the funding of a loan. Today, we will dive into the importance of due diligence and some of the types of risk assessment that should be considered when participating in these programs.
Due Diligence: Two Critical Words When Considering A Loan Participation
Prior to starting a loan participation program or entering into a loan participation agreement with a third party, officials must evaluate whether the program is compatible with the board’s risk tolerance, loan policies, and overall strategic plan. Purchasing financial institutions should consider the following factors:
- Does the seller have demonstrated ability to repurchase the participation, if required under the terms of the participation agreement?
- Is the product being sold time-tested? The seller should demonstrate experience in underwriting the product, and the product should have weathered a full economic and interest rate cycle.
- Can you (purchasing financial institution) underwrite the loan to your own standards and not rely on the analysis performed by the seller or the broker? The National Credit Union Association (NCUA) suggests the purchasing institution consider an independent analysis of credit quality.