Booking loans with good yield or giving up yield for moreloans.

For some credit unions, it’s a dilemma that plays out in a loanparticipation transaction where revenue is desired but not at theexpense of making sacrifices on yield.

One solution for a credit union with high loan demand is tobecome a net seller, said Guy Messick, attorney with Messick &Lauer PC in Media, Pa., who has extensive expertise in CUSOstartups. The net seller sells loan participations in its loans andretains servicing.

The way it works is a net seller credit union that retains 10%of its loans and sells 90% of the loans is able to leverage itslending capital ten-fold to serve more members, according toBrian Lauer, a partner with Messick & Lauer, and DavidDunn, certification manager for Unity Xchange LLC, a CUSO that connects credit unions that wantto buy and sell loan participations.

“You can always use loan and hold as a strategy,” Messick said."If you have good loan demand and credit unions willing toparticipate with you, can do much more in the way of lending.”

Dunn and Lauer said a credit union that maintains a memberbusiness loan portfolio of $10 million and the average loan is$100,000 with a 5% interest rate will generate $500,000 in grossrevenue. If the cost of funds is 2%, that is a net of $300,000 peryear in revenue before operating costs and the assumption that theorigination fees were 1%, so that is $100,000 in one-time fees.

If the credit union adopts the net seller business model andsells loan participations at the 90% level, the credit union will beable to take its $10 million and turn it into 1,000 loans of$100,000 each for a total servicing portfolio of $100 million inloans, according to Dunn and Lauer.

The credit union’s interest yield remains the same as the creditunion is still lending $10 million. The origination fees on the$100 million in loans are now $1 million and the servicing fee of100 basis points on the portion sold to other credit unions is$900,000. Fully leveraged, the net interest in this example wouldgenerate $900,000 more in origination fees and $900,000 in newserving fees.

If the seller is only at half capacity and makes $50 million inloans, the origination fees are $500,000, the servicing fees are$450,000, and the loan yield on $5 million (the 10% retained by theseller) is $150,000, Dunn and Lauer explained. So, while the loanyield is reduced by $150,000 as a result of selling 90% of the loanportfolio, that is more than made up by the servicing fees andincrease in origination fees.

“If you’re making all of your loans and hold them on the books,technically, the assets are built into the loans for servicingrights,” Lauer said. “But when you sell it off, you’re able tocharge that lender for the servicing piece, maximizing yourorigination from the lender.”

Lauer looks to the mortgage market to compare how the net sellermodel stacks up. Anecdotally, on the business lending side, yieldsare much higher, he said. Credit unions might think the yields, arein fact, ideal. However, on the mortgage side, there is not as muchof a focus on holding onto yields.

Messick said the NCUA has stated that there will be a regulationchange that will restrict the amount of loan participations acredit union can buy from one originator.

“There will be some limitation, but we don’t know what it willbe,” Messick said. “If you do have this lending capacity, you don’twant to be cut off because you don’t have enough buyers or becauseof a regulatory cap.”