Use Extra Due Diligence for Business Loan Participations
CUs improve balance-sheet management, boost loan returns, and enhance risk management.
Arizona State Credit Union in Phoenix is reaping the benefits of loan participations as part of its $190 million business lending portfolio, says John Pruitt, vice president of business services for the $1.4 billion asset credit union.
Arizona State serves as a loan originator that underwrites loans and then offers portions to participating credit unions. The credit union also participates in loans underwritten by other credit unions.
Pruitt says business loan participations help credit unions improve balance-sheet management, boost loan returns, and enhance risk management by diversifying the type and dollar amounts of loans held in portfolio.
But Pruitt notes the process requires a high level of due diligence.
“In the end, these loans should be reviewed just as carefully as if you had originated them yourself—and in some cases even more closely because the credit union doesn’t know the borrower,” Pruitt says.
He urges credit unions to address these factors when conducting due diligence for business loan participations:
- Risk assessment and management;
- The trade area in which the loans will be made;
- Concentration by loan type; and
- Loss mitigation strategies.