This document provides an overview of strategic loan participations for credit unions. It discusses the benefits and risks of loan participations for both selling and buying credit unions. Key points covered include regulatory compliance requirements, accounting standards, best practices for due diligence and risk management, and common problems to avoid. Loan participations allow credit unions to diversify assets, manage interest rates and liquidity, and increase lending capacity. However, both selling and buying credit unions must carefully assess credit and compliance risks to avoid potential legal liabilities.
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The quantum of fund required by big businesses/ corporates for various purposes like expansion, equipment purchase, plant set up, working capital etc. is huge which involves high risk for a single bank to provide the loan required.
Consortium finance is the way by which few banks come together and extend the loan facilities by sharing the loan amount between themselves.
This is also known as joint financing. Loan requirements of government and public sector units are also financed through consortium.
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The leveraged lending market has developed its own set of market terms and conventions, many of which do not exist outside of this market. This webinar gives a basic overview of leveraged finance credit agreements and the legal issues that arise when working on leveraged loans.
Part of the webinar series: LEVERAGED FINANCE 2021
See more at https://www.financialpoise.com/webinars/
Click on the link to watch full video-
https://youtu.be/mQuFxUCmZOs
The quantum of fund required by big businesses/ corporates for various purposes like expansion, equipment purchase, plant set up, working capital etc. is huge which involves high risk for a single bank to provide the loan required.
Consortium finance is the way by which few banks come together and extend the loan facilities by sharing the loan amount between themselves.
This is also known as joint financing. Loan requirements of government and public sector units are also financed through consortium.
Thank you for watching
Subscribe to DevTech Finance
The leveraged lending market has developed its own set of market terms and conventions, many of which do not exist outside of this market. This webinar gives a basic overview of leveraged finance credit agreements and the legal issues that arise when working on leveraged loans.
Part of the webinar series: LEVERAGED FINANCE 2021
See more at https://www.financialpoise.com/webinars/
It is critical for fund portfolio managers and analysts as well as financial executives of the investee companies to understand when valuation of debt or debt-like securities is required and how the subject debt's economics impact the "synthetic" credit rating, estimation of required yield, and valuation methodologies. In addition, proper identification of features of the debt instrument(s) that may require additional accounting consideration is essential.
Whereas, Commercial Bank of Ethiopia (CBE) has changed its strategic direction to customer centricity with the aim of making saving and credit products more customer centric based on customer value propositions;
WHEREAS, it has become necessary to improve customer experience by digitizing retail and micro business segment through Micro saving and loan products;
WHEREAS, it is necessary to set eligibility requirements, terms and conditions of saving and credit products and services to the retail and micro business segment in view of risk involved and customer’s demand;
WHEREAS, retail and micro business segments are viable and growing segments to be leveraged by the bank through designed products and services that can satisfy the segment’s demand;
WHEREAS, Commercial bank of Ethiopia intends to diversify its credit portfolio mix in terms of tenure through expanding the short-term financing to be availed to retail and micro business segments;
WHEREAS, it is necessary to attract the underserved segment of the society and enhance financial inclusion with low-cost financial services availed through mobile money platform;
NOW, therefore, this procedure is issued to enable implementation of bank’s DMSL policy.
1.2. Short Title
This procedure may be cited as” Digital Micro Saving And Loan Procedure of the Commercial Bank of Ethiopia.”
1.3. Definition of terms
“Credit policy” means a general framework approved by the board that spells out and guides the bank’s credit/financing strategic directions and credit /financing decisions.
“Credit Scoring” means judging/evaluating the creditworthiness of a customer based on basic characteristics and past performance in credit and other relationships with Bank.
“Digital Micro Credit” means micro loans that are requested, received and repaid all through mobile phones (or any other appropriate tools) via interaction with a computer system.
“Digital MSL Policy” means a policy document that governs the management of digital micro saving and credit services.
“Fixed Account” means a saving account locked for a certain period, a minimum of three months, based on the preference of the customers to fulfil their designated plan.
“Lending officials” means any person involved in MSL business of customer acquisition, Credit Worthiness evaluation, Credit operation, Collection, monitoring and decision-making as well as write off and post write off follow up process.
“Loan Pricing” means setting the interest rate, fees, commission, and others to be charged by the Bank on loans, advances, and guarantees extended to customers.
“Retail and Micro Business Segment” means a category of customers having less investible asset, trading transaction and return from business.
“Micro loan” means a small amount of loan availed to micro businesses and individuals for the purpose of supporting businesses and consumption.
“Micro Saving” means a saving scheme designed for small deposits from micro businesses and low income individ
Current Trends in Leveraged Finance (Series: Leveraged Finance)Financial Poise
This webinar discusses some of the latest trends and developments in leveraged finance terms and practices and the extent to which some of these have gained market acceptance.
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/current-trends-in-leveraged-finance-2021/
The A-Zs of participations—from buying and selling to all things participation in between. Attendees joined speakers as they discussed topics of increasing your loan portfolio through participations, the risks of participations, servicing of participations, and all other things participations.
What Kind of Loan? (Series: Business Borrowing Basics)Financial Poise
In a broad sense, most loans can be divided into two basic types: an asset-based loan (ABL) and a cash flow loan.
An ABL is made by a lender who underwrites the loan primarily by valuing the company’s assets, such as accounts receivable (A/R) and inventory. An ABL lender underwrites a loan based on the ability to liquidate its collateral should it need to. A “cash flow” lender, in contrast, while also secured against the borrower’s assets, underwrites the loan primarily based on the cash flow and general credit-worthiness of the borrower.
The distinction between these types of loans is only the beginning of understanding the many types of loans available to a business, because within each of the two types there are many subtypes.
This webinar takes the audience through a guided tour of the various borrowing options available to businesses, from both a business and legal perspective, to paint the overall landscape of the different types of lenders that exist and to provide a framework for understanding what type of lender and loan may make sense for any particular borrower.
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/what-kind-of-loan-2021/
Revenue-based financing panel discussion - for lawyersMelody Peng
Revenue-based financing is a unique way for tech entrepreneurs to fund their business and preserve equity early on.
Presented and moderated by Joe Wallin, Principal at Carney Badley Spellman, this deck describes the details of the funding structure, key terms, and some examples on how founders and entrepreneurs use the capital to grow their business.
This presentation is specific to startup lawyers and is a CLE course that's approved by the Washington State Bar Association.
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Discusses the parameters of the new definition of "loan originator," who is and is not a "loan originator" for purposes of the new rule? Also discussed is the prohibition on dual compensation, prohibited compensation based on a term of a transaction, and restrictions on pooled compensation plans.
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The threat of fraud against your members continues to grow. Criminals will continue to find new ways to breach information technology systems and seek access to money and sensitive information from credit union members. This session covered the latest state-of-the-art ways to better manage fraud.
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2. E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3153
eakeeney@kaufcan.com
Harvey L. Johnson, CPA
Witt Mares, PLC
150 West Main Street, Suite 1150
Norfolk, VA 23510
(757) 627-4644 x315
hjohnson@wittmares.com
3. Topics for Consideration
• Overview of Loan Participations
• Operational, Legal and Compliance Risks
• Tips to Avoid Risk, Abuses and Potential
Liabilities of Loan Participations
• Some Contract Tips
• Accounting Requirements
• Best Practices
4. GROWTH!!!
• As of June 2011
– 1,432 FICU’s reported loan participation loans with
total balances of $12.8 billion
– Since 2007 31% increase – up from $9.7 billion
5. What is a
Loan Participation?
• Defined by federal regulation as a “loan where one or
more eligible organizations participates pursuant to a
written agreement with the originating lender.”
• Essentially a loan made by one or more credit unions
to a single borrower and is typically accomplished by
an originating credit union selling a portion of a loan
to a second credit union.
6. Benefits of Loan Participations
to Seller
• Increase liquidity
• Increase ability to serve members since
participating lenders can extend loans for
higher amounts
• Mechanism to manage interest rates
• Manage credit and geographic concentration
risks
7. Benefits of Loan Participations
to the Buying Credit Union
• Diversified balance sheet
• Use of excess liquidity
• Increased revenue
8. Risks of Loan Participations
to Selling Credit Union
• Regulatory compliance
• Full disclosure
• Credit administration
• Accounting requirements
9. Risks of Loan Participations
to Buying Credit Union
• Risk assessment
• Strategic planning
• Due diligence
• Contracts and legal review
• Underwriting credit risks
• Internal controls
• Accounting requirements
10. NCUA Rules and Regulations
12 CFR § 701.22
• Organizations eligible to participate in loan
participations are:
– federal or state-chartered credit unions
– CUSOs
– any federally-chartered or federally-insured financial
institution
• Amount regulated by NCUA:
– no amount specifically identified for a federal credit union
– no federal credit union shall obtain an interest participation
loan if some of that interest and other indebtedness exceeds
10% of the federal credit union’s unimpaired capital or
surplus
11. Other NCUA Limitations
A federal credit union originating lender must:
• originate loans only to its members
• retain an interest of at least 10% on the face amount of each
loan (no reference to recourse or non-recourse)
• retain the original or copies of the loan documents
• require the credit committee or loan officer to use the same
underwriting standards for participation loans as other loans
underwritten and approved at the credit union
A written master participation agreement
12. Other Limitations
A participating federal credit union that is not
an originating lender shall:
• participate only in loans it is empowered to grant
• adopt a board-authorized participation policy setting forth loan
underwriting standards prior to entering into a participation
• participate in participation loans only if made to its own
members or members of another participating credit union
• retain original copies of participation agreement and a schedule
of all covered loans; and
• obtain approval of Board of Directors or ALCO
13. Other Limitations (cont.)
A risk assessment and due diligence shall be
performed prior to entering into any third-party
arrangement.
This is a mandatory requirement regardless of
whether or not the other party is a credit union
or a CUSO.
14. Due Diligence Items/Checklists
• Inspection of property/In person
• Review and analysis of appraisal
• Environmental Assessment
• Likelihood of resale
• Guarantors
• Loan servicer
• NCUA regulations & guidelines
– Section 701.22
– NCUA Letter No. 08-CU-26
15. Contract Issues/Checklists
• Loan servicer rights
• Representation & Warranties
– Underwriting policies
– Collection procedures
– Review of loan documentation
• Notice Provisions
• Attorney review of contract
• Accounting requirements and financial impact
17. Sale Accounting of Loan Participations –
FASB ASC 860-10-40
• Sale Criteria: In order for the Lead institution to account for the transfer of a
participating interest as a sale (vs. a secured borrowing), the loan
participation must:
‒ Qualify as a “Participating Interest; and
‒ Meet the requirements for sale accounting treatment.
• If the transfer meets the definition of a “participating interest,” then the
transferor (i.e., Lead Credit Union) must evaluate whether the transfer meets
the conditions to qualify for sale accounting:
1) Isolation of the transferred assets from the Lead,
2) The Participating Credit Union has the right to pledge or exchange the assets
received, and
3) The Lead does not have effective control over the transferred assets.
18. Definition of Participating Interest
• In general, a participation meets the definition of a “participating interest” if it
has the following characteristics:
1) Pro Rata Ownership
2) Proportionate Division of Cash Flows – All cash flows remittances are divided equally in
accordance with their share of ownership (except any cash flows allocated as compensation
for servicing).
3) Same Priority of Rights – No interest is subordinated to another interest, and no Participant
has recourse against Lead Credit Union other than standard representations and warranties
and contractual servicing and administrative obligations.
4) No Single Party May Pledge Entire Loan – No participating interest holder (including Lead)
has right to pledge entire financial asset unless all participating interest holders agree to do
so.
• If the participation does not meet the definition of a “participating interest,”
both Lead and Participating Credit Union must account for it as secured
borrowing with a pledge of collateral.
– Consider legal lending limits!
19. Is the Loan Participation a
Sale or Secured Borrowing?
• Indicators of a Sale • Indicators of a Secured Borrowing
– Language of purchase and sale – Recourse against the Lead
in the participation agreement – Repurchase obligation of the
(intent) – Guaranty of repayment by Lead
– No recourse, repurchase – Receipt by Participant of a greater
obligation or guarantee by Lead rate of repayment and yield (e.g., a
– Require Lead to promptly remit higher interest rate) than received
proceeds to Participants by Lead
– Payments by borrower are not – Termination of participation that
comingled with other funds does not coincide with loan
– Maturity, interest rate and other maturity
loan terms mirror borrower – Retainage by Lead of complete
agreements held by the Lead control over the participated loan
(e.g. collateral / assignment)
21. Risk Assessment & Strategic Planning
• “Caveat emptor” ‒ let the buyer beware!
• Identify potential risks during the planning and initial assessment
– Increases the opportunity to mitigate losses by determining in advance
the necessary controls and reporting systems.
• Examiners will evaluate the effectiveness of the credit union’s risk
assessment relative to each type of risk.
• Ensure the Board (and lending staff) have adequate training on loan
participations and member business lending
• Consider staffing, business recovery plans, internal controls
22. Establish Risk Tolerance Through
Strong Policies and Procedures
• Policies and procedures should consider the following items:
– Specific types of loan to be participated
• Consider staff experience and expertise – diversification is key
• How deviations from existing underwriting standards will be handled
– Establish reasonable concentration limits by
• Loan types
• Collateral types and limits (LTV)
• Industries (volatile or unstable markets)
• Geographical locations (credit union and individual loans)
– Underwriting Criteria
• Credit scores
• Loan-to-value limits
• Need for Cash flow analysis (MBLs)
– Analysis of appraisal assumptions and final valuations
23. Risk Measurement,
Monitoring and Control
• Complete a post-closing review of all loan documents to determine
that all terms and conditions are in accordance with the original
terms presented
– Agreements should include buy back provisions for missing
documentation, loans made outside of policy/agreement, other
nonconformities
• Monitor the loan as you would any other loan (payments,
delinquencies, internal reviews, etc.)
• Monitor liquidity and financial health of lead institution
• Obtain annual financial statements for larger, more complex
participations (i.e. MBLs)
• Independent audits of participating and lead credit unions
participation programs
25. Top 5 Loan Participation Problems
1. Lack of experience / training
2. Lack of contract and legal review
3. Participating Credit Union fails to conduct an independent
credit analysis
4. The Lead or Participating Credit Union fails to fund its pro-
rata amounts under credit agreement
5. Accounting for participation as a sale vs. secured borrowing
26. Final Thoughts
• Start small and gain experience over time.
• Training , Training, Training
– Credit unions must fully understand all aspects of the loan participation
arrangement.
• Treat like any other 3rd party relationship – risk assessment, due
diligence and monitoring.
• Management should determine whether bond coverage is
adequate for the new products and services.
• Seek legal counsel.
27. Other Guidance
• Supervisory NCUA Letter 08-CU026 – Evaluating
Loan Participation Programs
• NCUA Examiner’s Guide – Chapter 10, Pages 10A-
34 (participation loan & impermissible policies &
practices)
• NCUA Letter to Credit Unions 07-CU-13 – Evaluating
Third Party Relationships
• NCUA AIRES Questionnaire – Loan Participations
• Kaufman & Canoles’ Credit Union Newsletter
28. E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3153
eakeeney@kaufcan.com
Harvey L. Johnson, CPA
Witt Mares, PLC
150 West Main Street, Suite 1150
Norfolk, VA 23510
(757) 627-4644 x315
hjohnson@wittmares.com