As the national economy shuffles along its slow path torecovery, credit unions need additional tools to meet the multitudeof challenges ahead.

Loan-to-share ratios, for example, are currently hovering at69.7% as net interest margins continue to decline and regulationslimit access to borrowers outside current markets and geographicreach.

Loan participations are experiencing a renewed interest amongcredit unions as they are one answer to these roadblocks,especially since there is an anticipated expansion in loan demandfor the near future – in residential and commercial mortgages,business, auto and student loans.

By joining a loan participation network, credit unions gainadmission to a larger pool of borrowers, which can increase lendingcapacity quickly without the high costs of doing so on its own andwithout the added expense of hiring new staff.

These networks also help to spread risk geographically. As theGreat Recession affected some parts of the United States more thanothers, it makes sense to diversify risk. A loan participationnetwork enables the credit union to reach borrowers beyond itslocal geographical area to more favorable lending areas.

There are, additionally, a number of benefits from associationwith a network, including managing the considerable expense ofkeeping up with competitors and regulations, as well as newtechnology. By sharing expenses and rewards in a network, creditunions can achieve economies of scale and have access to innovativetechnology and valuable expertise.

On the income side of the calculus, benefits can be substantialand impressive. Participation returns for student loans, forinstance, can be comparable to small business loans in the range of300 to 400 basis points net ROI.

Individual student loans are usually smaller than businessloans, averaging $12,500. Student loan consolidations averagearound $50,000, but can go as high as $150,000. These smaller loansmake it easier to comply with new participation regulations thatlimit the concentrations of loans, especially those in largeamounts from a single originator.

Smaller credit unions that lack the resources for some types ofloans have the opportunity for economies of scale realized byjoining a network. These institutions may not have a commerciallending or mortgage department, but networks provide access to theexpertise needed to manage these assets. Marketing resources aresimilarly shared, allowing participants to get more for theirinvestment and market to a larger and more diverse market ofborrowers.

Liquidity management is also upgraded through a network as fundsare freed up for additional loans and other purposes. Membersbenefit from a larger source of loan funds. A network that isproperly managed and capitalized can help ensure that there iscontinuous oversight on underwriting and loan performance.

Next Page: Loan ParticipationsEvolution

Loan ParticipationsEvolution

Perhaps the most compelling reason that loan participations willbecome more widespread is the notion that technology hasdramatically changed the process as all of the steps are nowhandled electronically, which is imperative for time-sensitiveassets like student loans.

There is a critical need for a quick turnaround because of therequirement of delivering tuition to the student's school on atimely basis. Having the information available electronically takesthe guesswork out of the process.

Traditional participations relied on the loan originator'sunderwriting and due diligence. Buyers would view the loan jacketand documents post funding. Newer methods offer more transparencyand equitable treatment for participants.

All of the lenders are present at the time of origination andhave full access to the loan jacket and all documents—proof ofidentity, income and debt-to-income ratios. Each lender conductsunderwriting and due diligence of the loan at origination. All ofthe lenders have the choice to fund or not fund the loans, so youhave 10 lenders making a decision, resulting in 10 distinct loanapprovals.

Risk is shared by each of the 10 lenders as well. If, forinstance, a $100,000 loan defaults and is charged off, each lenderis responsible for only a tenth of the loan, or $10,000. This alsoallows participants to leverage their funds, as a commitment of $2million in origination funds can be leveraged into $20 million ofparticipation loans.

Loan participations are here to stay and are becoming a criticalpart of the credit union movement's future.

Vince Passione is CEO of LendKey TechnologiesInc. in New York City. CONTACT: (646) 626-7404or [email protected].