Participation Lending is a prime example of the spirit of the Credit Union Difference and its guiding cooperative philosophy. Sharing the risks among multiple credit unions while also sharing the rewards. Due to concerns over complexity, however, many credit unions shy away from this credit union lending practice, but with the right tools in place, they are not nearly as complicated as people think. Sure... it takes some extra work and carries a certain amount of risk, but the rewards are worth the work, especially if administered correctly. Here we will discuss participation lending - what it is and why you should be doing it now.
Participation Loans are loans granted to one borrower (a person or business) but backed by multiple lenders (banks, credit unions, individual investors, etc.). The lead credit union administers the loan and serves the borrower/member. But their risk is minimized by spreading it out among other credit unions. Risk is a central theme around participation loans, as it is very often the reason credit unions both seek them out and proceed cautiously.
Here are some very common reasons that participation loans are sold:
- Pushing a high loan to share ratio (90% or higher) can put credit unions in a liquidity crunch and draw attention from auditors. Rather than slowing your loan growth, selling loans creates room up some room to keep originating.
- Large dollar loans, whether to a business or individual, that may either not be possible for smaller credit unions to lend on their own, or just outside of their comfort zone.
- Selling loan participations can reduce your CU's credit risk to a customer or specific member base that carries greater than average risk.
- Credit unions that originate the loan can keep the member relationship intact by keeping all the member interactions and administrations in-house for loans that they could not do on their own due to size or risk.
- Selling gives you a way to lend to member's business while staying under the business lending cap.
And common reasons credit unions buy into Participation Loans:
- Buying loan participations enable your CU to share in the profits of the lead credit union, which can help if you are struggling in a slow market or experiencing less than stellar loan growth.
- Buying participation loans allows credit unions to better diversify their assets. You are able to invest in a variety of loans, and loans in different locations. This limits your exposure to potential losses if a natural disaster or economic issue hits a particular community.
Throughout these examples, you can see where there may be upside for your particular situation. Whether you have loans you can't grant alone, or a desire to diversify your members' investments, Participation Loans may be an offering you want to consider. It also gives you the opportunity to experience the cooperative nature of the Credit Union Difference you love.
As a bonus, take a look at Ohio Healthcare Federal Credit Union and how they have recently started leveraging the power of participation lending: