Is participation lending something your credit union should do?
Participation Lending is a prime example of the spirit of the Credit Union Difference and its guiding cooperative philosophy. Sharing the risks among multiple credit unions while also sharing the rewards. Due to concerns over complexity, however, many credit unions shy away from this credit union lending practice, but with the right tools in place, they are not nearly as complicated as people think. Sure… it takes some extra work and carries a certain amount of risk, but the rewards are worth the work, especially if administered correctly. Here we will discuss participation lending – what it is and why you should be doing it now.
Participation Loans are loans granted to one borrower (a person or business) but backed by multiple lenders (banks, credit unions, individual investors, etc.). The lead credit union administers the loan and serves the borrower/member. But their risk is minimized by spreading it out among other credit unions. Risk is a central theme around participation loans, as it is very often the reason credit unions both seek them out and proceed cautiously.
Here are some very common reasons that participation loans are sold:
- Pushing a high loan to share ratio (90% or higher) can put credit unions in a liquidity crunch and draw attention from auditors. Rather than slowing your loan growth, selling loans creates room up some room to keep originating.