The Pros and Cons of Participation Loans

Managing these loans requires a careful and calculated approach.

December 24, 2010
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Loan participation case studies

The council white paper also includes several case studies from credit unions actively involved in loan participation programs. Among them are:

  • Delta Community Credit Union, Atlanta, which has successfully built a diversified portfolio of participation loans, including auto, residential and commercial real estate, cooperative housing, taxi medallion, and commercial equipment loans.
  • Evangelical Christian Credit Union, Brea, Calif., which is one of the largest providers of credit union loan participations in the U.S. The credit union began its loan participation program in 1990 and has originated over $4 billion in participations during the past 20 years. It services a participation portfolio of just over $2 billion today.
  • Arizona State Credit Union, Phoenix, with experience in a wide range of loan participation types, describes how it handled adversity with a restaurant loan, a hotel loan, and a land loan. The lesson: When you enter into a participation purchase or sale, you might not expect to have to deal with the specific terms of the participation agreement. In reality, you do; and often those terms are outside your control.
  • Sandia Laboratory Federal Credit Union, Albuquerque, N.M., which shares its loan participation policy, developed and approved by its board. The policy reflects National Credit Union Administration regulations and covers the basics of making participation loans.

The white paper also includes a section on small credit unions’ experiences with participation loans. While this type of lending is more common among larger credit unions, participation loans can provide smaller credit unions with the advantages of risk-pooling, sharing expertise, and bottom-line rewards.

Sometimes partnering with other credit unions through a CUSO is an effective way for a smaller credit union to take advantage of the benefits of loan participations. This can also allow the credit union to serve members it might otherwise have to turn away.

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