Pros and cons
The conclusion of the white paper: Consider the pros and cons of loan participations and your credit union’s particular situation before getting involved.
Pros include that loan participations:
- Provide a source for selling loans to keep under the 12.25% business lending cap;
- Offer geographic and loan type diversification; and
- Provide an average loan yield that can be three times the amount of the average investment.
- Increased complexity of loan participations;
- Greater risk; for example, when large participation loans go bad, hefty dollar losses are shared by all; and
- Greater regulatory scrutiny, particularly following recent exposure of some banks’ excessive risk-taking. NCUA expects credit unions that put loan participations on the books to have the experience and expertise to assess risk. The burden is on the credit union to prove it.
Loan participations “have numerous advantages but are complex and attracting regulatory attention,” notes the white paper. “They need to be ‘done right’ to work, and require quality partners and resources or access to those resources. Programs profiled in this paper seem to indicate that the risks, if managed prudently, are well worth taking.”