Tough question: when did you last seriously review your loan participation reports? Most credit unions LoanStreet surveyed, regardless of size, admit they rarely do.
What if you bought an auto pool expecting a 3.5% yield but, due to inaccurate reporting, received 3.25%? Or sold a pool expecting to keep 25 bps of servicing income but earned 15? You probably wouldn’t have done either deal. Trust your participation partner, but verify: monthly reporting is prone to material mistakes from flawed core modules and human error.
How big is the problem?
The participation reports LoanStreet has audited, from the largest credit unions to the smallest, did not accurately report the correct proceeds to buyers. Sellers often lose roughly 5 bps or more a year in servicing income; buyers can easily lose 2.5% to 5% of their return a year. Regulators have noticed: an NCUA Office of General Counsel opinion stressed complying with the participation rule over the entire life of a transaction, not just at sale.
The most common errors
- Improper calculation of servicing spreads.
- Incorrect deductions for charged-off loans.
- Taking money from one loan to fund costs on another loan in the same pool.
- Failing to track principal increases, leading to over-distribution.
Skip-a-pay programs are a classic example. If a skip-a-pay adds to a member’s principal instead of charging a fee, the buyer should get the benefit of that principal increase without offset. Many back-office systems instead deduct it from other loans in the pool. The numbers appear to add up, but they’re wrong, and the errors compound over time.
What to do
- Review monthly reports and ask the right questions. Was interest received on each loan equal to the agreed pass-through rate at the loan level, rather than pool-level math? How were principal increases tracked?
- Fix the systems. Manually checking reports each month is error-prone and unscalable. The only path forward is technology that calculates and tracks these items correctly.