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.
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 participation loans presents an opportunity for credit unions to mitigate their credit risk when dealing with customers or members who have a higher-than-average risk profile.
By sharing the loan with other credit unions, the risk is spread out, providing a safety net for the lead credit union. This not only protects the credit union but also allows them to support members who may otherwise be deemed too risky.
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 loan participations provides credit unions with a valuable opportunity to support their members' businesses while also staying within the limits of the business lending cap.
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: