Loan participations offer the best of cooperative philosophy put into practice—sharing the risks among borrowers while sharing the rewards of attractive yields. But they also offer challenges due to their complexity and increased regulatory scrutiny.
Balancing the risks and rewards is key to successfully implementing and maintaining a loan participation program at your credit union, according to “Loan Participations,” a white paper from the CUNA Lending Council.
Experience is critical in participation lending, says Brad Mundine, regional manager of credit union protection risk management at CUNA Mutual Group. “If a participation loan doesn’t fall within the credit union’s general loan policy, it’s difficult to be underwritten in accordance with the credit union’s appetite for risk.”
Managing participation loans requires a careful and calculated approach from experienced lending staff, he says. These loans also require constant oversight as market risk and credit risk change over the loan term. If your credit union doesn’t have the necessary on-staff expertise to manage these loans, vendors or third-party underwriters might be options to investigate.
If your credit union decides to partner with a vendor, Mundine suggests taking these steps before signing a third-party agreement:
Next: Board due diligence