Collaboration and cooperation have always played major roles in the credit union ethos. One of the best examples of that philosophy in action is participation lending, which is when credit unions band together to back a loan to a single borrower. By doing so, credit unions can share the risks and rewards. For many credit unions, mitigating risk is vital, and so is the spirit of community that can be enhanced when rewards are shared.
At economically uncertain times like these, the chance for increased profits with reduced exposure to risk is appealing. However, many credit unions continue to shy away from participation lending because it’s too complicated or they don’t understand how it works. Let’s have a closer look at some of the benefits participation lending can have for credit unions.
The benefits of participation lending for credit unions
So how exactly does participation lending work? Essentially, an individual or business who wishes to borrow money can take out a participation loan with their primary credit union. The loan is issued for one borrower or member by an originating lender who underwrites and closes the loan. Afterward or sometimes simultaneously, the loan is backed by multiple credit unions, banks, or investors.
Because the loan that is granted is backed by multiple entities, risk is spread out among various credit unions. If the loan is paid back on time, all the credit unions and investors share in the rewards. There are many potential benefits and rewards for credit unions in participation lending. These include the following:
- Potential profits. Especially when market or company growth has been slow, the prospect of increasing profits is important. But perhaps as important is the prospect of increasing profits with a reduction in risk due to the collaborative nature of participation lending. As the economic future of the nation remains uncertain, it’s a good idea for credit unions to find more ways to mitigate risk in their business. Participation lending enables CU’s to mitigate risk while potentially increasing revenue streams.
- Creating diversity. Investing in participation lending is a great way for CU’s to diversify their assets. Because you are not limited to purchasing loans in one area, or one type of loan, credit unions can collaborate with other credit unions and banks all over the United States to build their portfolios. This can help to serve as a hedge on the market if a natural disaster or economic crisis affects a certain area.
- You can’t always do it alone. If you’re not ready to grant loans alone at your CU, participation lending could be a good option to start with. It allows you to participate in lending while not taking on all the risk alone.
- Increased liquidity. One of the most important aspects of participation lending is that it increases liquidity and helps credit unions originate larger loans through cooperation with other financial institutions.
- Sense community. Let’s face it, with lending participation loans, you share in the profit and you share in the loss. This creates a sense of community among credit unions and lenders.
During uncertain times like these, it’s not always easy to know what direction your CU should take or if participation lending is right for your credit union. Before making any decisions, talk things over with your board, assess your needs and future plans, and agree on what sort of risks your CU is willing to take.
Participation lending has seen dynamic growth over the past five years, and it seems unlikely the trend will stop because of the pandemic. Uncertain times call for people coming together in their community, and credit unions coming together with their members. As credit unions have always been cooperative and collaborative in nature, participation lending may be a good place to start.