Buying loan participations lets credit unions diversify their balance sheets, deploy excess liquidity more profitably, and grow revenue. Yet many stay on the sidelines, unsure they can assess the credit risk or manage due diligence and post-sale reporting. Here are five common myths, and the facts.
Myth 1: Participation loans are just the “bad” loans
Truth: One of the best indicators that a loan will perform is that it is currently performing, which is why so much of the market is performing, seasoned loans. Sellers care deeply about their reputation for quality loans and servicing. Buyers also hold contractual rights covering how loans can be modified and, in special cases, removing the lead as servicer.
Myth 2: Buying a participation means venturing into the unknown
Truth: Buyers know the seller upfront and can review its origination, servicing, collections, repossession practices, audited financials and charge-off history in secure online data rooms, along with the individual loans.
Myth 3: The NCUA and examiners are critical of participation buyers
Truth: The NCUA is quite supportive and has held numerous webinars and issued guidance on well-run programs. Examiners will review programs for safety and soundness, but not having a participation program can itself be a risk: less diversification, liquidity or income.
Myth 4: All monthly participation reports are the same
Truth: Quality, accuracy and timeliness vary dramatically. Review proposed reports and delivery timelines before buying. Buyers are contractually and regulatorily entitled to timely, accurate, full-month reports, delivered in time to close monthly financials and quarterly regulatory reports. The NCUA’s 2018 Office of General Counsel opinion highlighted that failing to report accurately is often a regulatory failure too.
Myth 5: Credit unions can only buy the loan types they originate
Truth: Generally, a credit union can participate in any loan it is “empowered” to make, as long as it has the right policies and the internal expertise to understand the credit risk.