Loan Participation Originations May Trip Up Some Credit Unions: CUSO CEO
With the recent takeover of Telesis Community Credit Union, the intricacies of the loan participation transaction are in the spotlight.
The $318 million credit union in Chatsworth, Calif., amassed millions of dollars of them over the years. Telesis is the founder and was one of the owners of Business Partners LP, a business lending CUSO that serves 180 credit unions.
For most credit unions, entering into a loan participation arrangement is a common transaction with the buyer exercising due diligence to ensure that the loan is viable. However, the starting point in the deal could potentially pose some risks.
“The problem is not loan participations, it’s how they are originated,” said Michael Gudely, president/CEO of Innovative Business Solutions, a business lending CUSO in Fort Mill, S.C.
If a credit union originates a loan in its market that is too big for its risk tolerance, a loan participation is a logical vehicle to close the loan and reduce risk, Gudely explained.
“If the loan is offered by a loan broker after it’s been declined by most, if not all the local lenders, only to be offered to an out-of-state credit union, that’s a very high-risk situation,” he said. “These borrowers are desperate and are willing to pay fees that are twice, three times what a credit union would normally charge.”
Gudely stressed that loan participations, when conducted in a sound manner and based on a local borrower request that is approved by a local lender, can benefit credit unions.
“To sell participations in loan broker deals, from who knows where, is presenting a material risk to the credit union industry and the NCUSIF,” he said.
On Monday, the NCUA announced it had contracted with the $1.3 billion Premier America Credit Union in Chatsworth to manage the assets of Telesis, which was initially placed in conservatorship March 23.