Shared loan risks and the challenges of increased regulatory scrutiny are a few of the highlights of a new loan participation white paper.
According to the CUNA Lending Council publication, the benefits of loan participations include being a source for selling loans to keep under the 12.25% member business lending cap, geographic and loan type diversification, and an average loan yield potentially three times the amount of the average investment. However, loan participations "are more complex and when the loan goes south the misery of hefty dollar losses is shared with all."
The white paper examines a variety of business models using this loan type, a sample policy, board questions, regulatory oversight, information on finding a partner and more. For example, the board in its role as watchdog also needs to decide whether management has a thorough understanding of the risks, underwriting, pricing and terms of each loan, whether it's member business, real estate, or construction lending.
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"Managing participation loans requires a calculated approach from experienced lending staff; these loans require constant oversight as market risk and credit risk change over the loan term," the council wrote.
CUNA Lending Council members can receive a free copy of the white paper.
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