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Loan participations vs. syndications: What’s the deal?

Loan participations vs. syndications: What’s the deal?

Posted on Jun 29, 2021 by Bob Laffler, CPA  | Tags: Accounting , Auditing

Loan participations and loan syndications are terms often interchanged to describe a lending arrangement involving more than one lender; however, for accounting and reporting purposes, these are two different types of transactions with unique considerations and issues. We often get questions from participants in our classroom Banking Industry Fundamentals training programs and have dedicated time to this subject in our eLearning series available on the Revolution, our online learning platform.

While both loan participations and syndications involve multiple lenders, the way each is structured results in different accounting issues, including derecognition under ASC 860 and recognition of fees under ASC 606 and/or ASC 310.

Loan Participations:

loan assignment vs loan participation

In a loan participation, the originating bank enters into several lending arrangements. The first transaction is the loan origination to the borrower. This transaction will follow the normal accounting for loans under ASC 310. The unloading of a portion of the loan to participating banks represents a “transfer of a financial asset” (i.e. the loan, or a portion of the loan) and must be assessed for derecognition under ASC 860. This analysis involves determining if the participating loan represents a “participating interest” under ASC 860 and further whether control over the participating loan has been relinquished by the originating bank.

Loan Syndications:

loan assignment vs loan participation

In a loan syndication, the bank with the “relationship” with the borrower likely does not want to assume the risk of issuing such a large loan. As a result, rather than underwrite the entire loan and look to participate it out to other banks, the lead bank acts as a “syndicate”, matching the borrower up with multiple lenders, each of which underwrites and originates its own loan to the borrower. As a result, there are multiple loans issued by numerous banks to the one borrower.

Loan syndications do not involve any “transfers of financial assets” as each loan in a syndication is between a respective originating bank and the borrower. As a result, ASC 860 and the analysis of derecognition is not an issue. However, there are some issues for the lead syndicate bank involving revenue recognition related to the fees it collects from the borrower. Some of these fees may represent “syndication fees” for arranging the deal, as well as typical lenders fees for the loan it has underwritten itself. Also, these arrangements may involve the lead syndicate servicing the series of loans on behalf of the syndicate banks. For these loans, other than its own originated loan, the lead syndicate will need to recognize a servicing asset (or liability) in accordance with ASC 860.

loan assignment vs loan participation

How do you tell the difference?

As it is illustrated above, these two arrangements (a loan participation and syndication) have unique terms even though they achieve the same economic result. Therefore, the only way to know whether you are dealing with a participation or syndication is the READ the loan agreements! Careful consideration should be given to the legal underwriters and parties to the contract, contractual terms of the instruments, and other conditions to make a final analysis.

Often it is a legal determination that will dictate whether it is a loan participation or syndication. Once this determination is made, it’s on to the accounting analysis!

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Compliance Blog

Financial innovation: recent changes to loan participations.

At its September 2023 meeting, the NCUA board unanimously approved a final rule that would amend NCUA’s existing regulations to make it easier for credit unions to work with third-parties in the lending space, such as financial technology (FinTech) companies. The rule took effect on October 30, 2023. NAFCU’s Regulatory Affairs team has published a members-only final regulation summary of this final rule. Let’s review some of the compliance implications of these recent changes:

Loan Participations

This week’s blog will focus on the effect these changes will have on “loan participation,” which are covered by section 701.22 of the NCUA regulations. Generally speaking, a loan participation occurs whenever the ownership interests in a loan is divided up and sold. Under section 701.22, federally insured credit unions (FICUs) can buy participation interests in loans under certain conditions. The regulation requires that there be a written loan participation agreement, which must meet certain requirements. Additionally, the rule requires that the originating lender must retain an interest in the loan – at least 5 or 10 percent, depending on institution type – for the life of the loan. While section 701.22 focuses on purchasing participation interests, FICUs are also permitted to sell interests in loans they’ve made (but an FICUs which purchase those interests would be subject to the purchasing requirements of section 701.22).

The recent financial innovation rule made one particularly notable change with regards to loan participations. FICUs often engage in “indirect lending” relationships, in which they work with a third-party to facilitate transactions with new borrowers – for example, many credit unions may work with an auto dealership, who will partner with the credit union for financing of loans on vehicles the dealership sells. The recent changes to the lending rules have implications for these relationships. Section 701.22 now defines the term “originating lender” to include “a participant that acquires a loan through an indirect lending arrangement as defined under § 701.21(c)(9).”

Importantly, this section refers to section 701.21(c)(9) which defines “indirect lending arrangement” to mean:

“a written agreement to purchase loans from the loan originator where the purchaser makes the final underwriting decision regarding making the loan, and the loan is assigned to the purchaser very soon after the inception of the obligation to extend credit.”

(emphasis added).

Putting these things together, the rules state that if a credit union makes the final underwriting decision and is assigned the loan soon after the inception of the obligation, then the credit union will be treated as the “originating lender” of the loan for purposes of section 701.22. This means that, if interests in the loan were to be divided up and sold as participation interests, the “originating lender” who must retain an interest in the loan would not be the indirect lending partner (i.e. the auto dealership) which interacted with the borrower, but instead would be the credit union that partnered with them and made the final underwriting decision. The preamble notes that modern technology now allows for almost instantaneous assignment of loans, meaning that credit unions may be making the underwriting decisions and immediately receiving assignment of the loans as soon as they’re made, which points in favor of treating the credit union as the originating lender.

One implication is that credit unions may now find it easier to work with third parties to find potential member-borrowers and then sell interests in those loans without needing to keep the third-party involved after the initial stages. During its discussion of this rule at its September 2023 meeting, the NCUA board noted that these changes could allow FICUs to expand beyond relationships with auto dealers to form lending arrangements with other third-parties, such as FinTech companies. However, the board also stressed that due diligence when entering third-party relationships will remain important.

Other Notable Changes

The financial innovation rule is dense, and we cannot cover the entire thing in a single blog – as mentioned above, NAFCU members can check out the final regulation summary our Regulatory Affairs team has written for this rule. However, there were at least two other notable things in the final rule that we wanted to highlight regarding loan participations:

Clarification Regarding Which Rule Applies

The final rule notes that there was some confusion amongst credit unions regarding whether a transaction was a loan participation or an eligible obligation. Eligible obligations are covered by section 701.23 of the NCUA regulations and occur when a Federal Credit Union (FCU) buys or sells, in cover situations in which an FCU buys part of a loan, but less than the entire thing, which is typically how loan participations are described as well. Thus, there were some situations that seemed like they could fit within the definitions of either activity, creating confusion amongst credit unions regarding which provision applied.

The new amendments to these rules add a provision to section 701.23 that clarifies that the eligible obligation rules only apply if the transaction does not meet the definition of “loan participation.” Thus, when a transaction could fit under either definition, the rule now defaults to the transaction being treated as a loan participation. Section 701.23 only applies if the transaction involves a borrower that is a member of the FCU and the transaction does not fit the definition of a loan participation, such as when the originating lender does not retain an interest in the loan. According to the preamble, the has been a long-held position of NCUA, which is just now being codified into the regulations.

Which Types of Interests Qualify

In the preamble to the final rule, NCUA notes that merely selling the interest on a loan (and not the principal) would not be sufficient. The agency states: “[t]o meet the definition of a participation interest under [Generally Accepted Accounting Principles or GAAP], the transferor generally must sell a pro-rata share of principal and interest …” (emphasis added). The agency then states that the sale of an interest that does not fit the definition of “participation interest” under GAAP would not fit the definition of either loan participation or eligible obligation.

Stay tuned to the NAFCU Compliance Blog , where we’ll continue to update our members on evolving compliance challenges and considerations.

🎯 Online Compliance Training Subscriptions : For just one price, your entire credit union receives access to over 40 hot-topic compliance webinars per year, so your team can master challenges like BSA, data security, risk management, loss prevention, and more. Learn more . 

About the Author

Nick st. john, ncco, ncbso, director of regulatory compliance, nafcu.

Nick St. John, Regulatory Compliance Counsel, NAFCU

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Syndicated Loans: Overview | Practical Law

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Syndicated Loans: Overview

Practical law canada practice note overview 2-615-9846  (approx. 17 pages).

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Assignments and Participations of Loans

Practical law practice note 8-381-8532  (approx. 22 pages).

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Assignment, novation or sub-participation of loans             

Transfers of loan portfolios between lending institutions have always been commonplace in the financial market.  A number of factors may come into play – some lenders may wish to lower their risks and proportion of bad debts in their balance sheets; some may undergo restructuring or divest their investment portfolios elsewhere, to name a few.  The real estate market in particular has been affected by the announcement of the “three red lines” policy by the People’s Bank of China in 2020 which led to a surge of transfers, or attempted transfers, of non-performing loans.  Other contributing factors include the continuous effects of the Sino-US trade war and the Covid-19 pandemic.

Fiona Chan

T +852 2905 5760 E [email protected]

Transferability of Loans

The legal analysis regarding the transferability of loans can be complex.  The loan agreement should be examined with a view to identifying any restrictions on transferability of the loan between lenders, such as prior consent of the debtor and, in some cases, whether such consent may be withheld.  Other general restrictions may apply given that most banks have internal confidentiality rules and data protection requirements, the latter of which may also be subject to governmental regulations.  Certain jurisdictions may restrict the transfer of loans relating to specific types of receivables – mortgage or consumer loans being prime examples.  It is imperative to conduct proper due diligence on the documentation and underlying assets in order to be satisfied with the transferability of the relevant loans.  This may be complicated further if there are multiple projects, facility lines or debtors.  It is indeed common to see a partial transfer of loans to an incoming lender or groups of lenders.

Methods of Transfer

The transfer of loans may be carried out in different ways and often involves assignment, novation or sub-participation.

A typical assignment amounts to the transfer of the rights of the lender (assignor) under the loan documentation to another lender (assignee), whereby the assignee takes on the assignor’s rights, such as the right to receive payment of principal and interest on the loan.  The assignor is still required to perform any obligations under the loan documentation.  Therefore, there is no need to terminate the loan documentation and, unless the loan documentation stipulates otherwise, there is no need to obtain the debtor’s consent, but notice of the assignment must be served on the debtor.  However, many debtors are in fact involved in the negotiation stage, where the parties would also take the opportunity to vary the terms of the facility and security arrangement.

Novation of a loan requires that the debtor, the existing lender (transferor) and the incoming lender (transferee) enter into new documentation which provides that the rights and obligations of the transferor will be novated to the transferee.  The transferee replaces the transferor in the loan facility and the transferor is completely discharged from all of its rights and obligations.  This method of transfer does require the prior consent of the relevant debtor.

Sub-participation is often used where a lender, whilst wishing to share the risks of certain loans, nonetheless prefers to maintain the status quo.  There is no change to the loan documentation – the lender simply sells all or part of the loan portfolio to another lender or lenders.  From the debtor’s perspective, nothing has changed and, in principle, there is no need to obtain the debtor’s consent or serve notice on the debtor.  This method of transfer is sometimes preferred if the existing lender is keen to maintain a business relationship with the debtor, or where seeking consent from the debtor or notifying the debtor of any transfer is not feasible or desirable.  In any case, there would be no change to the balance sheet treatment of the existing lender.

Offshore Security Arrangements

The transfer of a loan in a cross-border transaction often involves an offshore security package.  A potential purchaser will need to conduct due diligence on the risks relating to such security.  From a legal perspective, the security documents require close scrutiny to confirm their legality, validity and enforceability, including the nature and status of the assets involved.  Apart from transferability generally, the documents would reveal whether any consent is required.  A lender should seek full analysis on the risks relating to enforcement of security, which may well be complicated by the involvement of various jurisdictions for potential enforcement actions.

A key aspect to the enforcement consideration is whether a particular jurisdiction requires that any particular steps be taken to perfect a security interest relating to the loan portfolio (if the concept of perfection applies at all) and, if so, whether any applicable filing or registration has been made to perfect the security interest and, more importantly, whether there exists any prior or subsequent competing security interest over all or part of the same assets.  For example, security interests may be registered in public records of the security provider maintained by the companies registry in Bermuda or the British Virgin Islands for the purpose of obtaining priority over competing interests under the applicable law.  The internal register of charges of the security provider registered in the Cayman Islands, Bermuda or the British Virgin Islands should also be examined as part of the due diligence process.  Particular care should be taken where the relevant assets require additional filings under the laws of the relevant jurisdictions, notable examples of such assets being real property, vessels and aircraft.  Suites of documents held in escrow pending a potential default under the loan documentation should also be checked as they would be used by the lender or security agent to facilitate enforcement of security when the debtor defaults on the loan.

Due Diligence and Beyond

Legal due diligence on the loan documentation and security package is an integral part of the assessment undertaken by a lender of the risks of purchasing certain loan portfolios, regardless of whether the transfer is to be made by way of an assignment, novation or sub-participation.  Whilst the choice of method of transfer is often a commercial decision, enforceability of security interests over underlying assets is the primary consideration in reviewing sufficiency of the security package in any proposed loan transfer.

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Worldwide: Assignment, Novation Or Sub-Participation Of Loans

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Transfers of loan portfolios between lending institutions have always been commonplace in the financial market. A number of factors may come into play – some lenders may wish to lower their risks and proportion of bad debts in their balance sheets; some may undergo restructuring or divest their investment portfolios elsewhere, to name a few. The real estate market in particular has been affected by the announcement of the "three red lines" policy by the People's Bank of China in 2020 which led to a surge of transfers, or attempted transfers, of non-performing loans. Other contributing factors include the continuous effects of the Sino-US trade war and the Covid-19 pandemic.

TRANSFERABILITY OF LOANS

The legal analysis regarding the transferability of loans can be complex.  The loan agreement should be examined with a view to identifying any restrictions on transferability of the loan between lenders, such as prior consent of the debtor and, in some cases, whether such consent may be withheld.  Other general restrictions may apply given that most banks have internal confidentiality rules and data protection requirements, the latter of which may also be subject to governmental regulations.  Certain jurisdictions may restrict the transfer of loans relating to specific types of receivables – mortgage or consumer loans being prime examples.  It is imperative to conduct proper due diligence on the documentation and underlying assets in order to be satisfied with the transferability of the relevant loans.  This may be complicated further if there are multiple projects, facility lines or debtors.  It is indeed common to see a partial transfer of loans to an incoming lender or groups of lenders.

METHODS OF TRANSFER

The transfer of loans may be carried out in different ways and often involves assignment, novation or sub-participation.

A typical assignment amounts to the transfer of the rights of the lender (assignor) under the loan documentation to another lender (assignee), whereby the assignee takes on the assignor's rights, such as the right to receive payment of principal and interest on the loan.  The assignor is still required to perform any obligations under the loan documentation.  Therefore, there is no need to terminate the loan documentation and, unless the loan documentation stipulates otherwise, there is no need to obtain the debtor's consent, but notice of the assignment must be served on the debtor.  However, many debtors are in fact involved in the negotiation stage, where the parties would also take the opportunity to vary the terms of the facility and security arrangement.

Novation of a loan requires that the debtor, the existing lender (transferor) and the incoming lender (transferee) enter into new documentation which provides that the rights and obligations of the transferor will be novated to the transferee.  The transferee replaces the transferor in the loan facility and the transferor is completely discharged from all of its rights and obligations.  This method of transfer does require the prior consent of the relevant debtor.

Sub-participation is often used where a lender, whilst wishing to share the risks of certain loans, nonetheless prefers to maintain the status quo.  There is no change to the loan documentation – the lender simply sells all or part of the loan portfolio to another lender or lenders.  From the debtor's perspective, nothing has changed and, in principle, there is no need to obtain the debtor's consent or serve notice on the debtor.  This method of transfer is sometimes preferred if the existing lender is keen to maintain a business relationship with the debtor, or where seeking consent from the debtor or notifying the debtor of any transfer is not feasible or desirable.  In any case, there would be no change to the balance sheet treatment of the existing lender.

OFFSHORE SECURITY ARRANGEMENTS

The transfer of a loan in a cross-border transaction often involves an offshore security package.  A potential purchaser will need to conduct due diligence on the risks relating to such security.  From a legal perspective, the security documents require close scrutiny to confirm their legality, validity and enforceability, including the nature and status of the assets involved.  Apart from transferability generally, the documents would reveal whether any consent is required.  A lender should seek full analysis on the risks relating to enforcement of security, which may well be complicated by the involvement of various jurisdictions for potential enforcement actions.

A key aspect to the enforcement consideration is whether a particular jurisdiction requires that any particular steps be taken to perfect a security interest relating to the loan portfolio (if the concept of perfection applies at all) and, if so, whether any applicable filing or registration has been made to perfect the security interest and, more importantly, whether there exists any prior or subsequent competing security interest over all or part of the same assets.  For example, security interests may be registered in public records of the security provider maintained by the companies registry in Bermuda or the British Virgin Islands for the purpose of obtaining priority over competing interests under the applicable law.  The internal register of charges of the security provider registered in the Cayman Islands, Bermuda or the British Virgin Islands should also be examined as part of the due diligence process.  Particular care should be taken where the relevant assets require additional filings under the laws of the relevant jurisdictions, notable examples of such assets being real property, vessels and aircraft.  Suites of documents held in escrow pending a potential default under the loan documentation should also be checked as they would be used by the lender or security agent to facilitate enforcement of security when the debtor defaults on the loan.

DUE DILIGENCE AND BEYOND

Legal due diligence on the loan documentation and security package is an integral part of the assessment undertaken by a lender of the risks of purchasing certain loan portfolios, regardless of whether the transfer is to be made by way of an assignment, novation or sub-participation.  Whilst the choice of method of transfer is often a commercial decision, enforceability of security interests over underlying assets is the primary consideration in reviewing sufficiency of the security package in any proposed loan transfer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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How are assignment and participation treated?

An “ assignment ” under New York law is the legal term used to refer to the transfer of rights, such as the right to receive payments on a loan , while “delegation” is the legal term used to refer to the transfer of obligations, such as the obligation to make loans .  However, “assignment” as commonly used in the US refers to the transfer of both rights and obligations of the assignor/ seller under a credit agreement, such that the assignee/buyer comes into privity of contract with the borrower .

An “ assignment ” as used under English law is the transfer from a lender to another party of the rights to interest and principal – not any obligations – for amounts already drawn down and owing to the lender.  Only the benefit of an agreement may be assigned, with any commitment to provide funds to the borrower remaining with the existing lender.  The transferee (buyer) assumes the rights of the transferor (seller) and enters into a direct relationship with the parties to the loan agreement – the borrower, the agent and the other lenders .

Where a US participation transfers the beneficial and economic ownership of a loan, under English law the loan remains with the originating lender and an unsecured debtor-creditor relationship is created between the participants and the grantor.  Therefore, a US participation is effectively a true sale , where an LMA-style participation if refinancing for the loan originator and grantor.  However, both US and UK participations create a new contract between the original lender and the loan buyer, while leaving the contract between the borrower and the original lender unchanged.

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Loan Participation vs. Syndication: What's the Difference

  • April 29, 2021

loan assignment vs loan participation

Understanding the difference between loan participation vs. syndication is critically important when fulfilling your borrowing needs. Lenders seeking to generate new avenues of income or meet the local community’s borrowing needs should begin by examining each process. By immersing yourself in the details of loan participation programs and loan syndication programs, you can find a solution that aligns with your needs.

Here is what to understand about loan participation vs. loan syndication, with a special focus on the importance of loan participation programs to the modern financial marketplace.

Loan Participation vs. Syndication: What to Know

What is loan participation.

Loan participation entails a lender selling portions of an outstanding loan to buyers who may subsequently collect interest and principal payments from that loan. Most loan participation occurs between two or more financial institutions, allowing multiple banks or credit unions to effectively share ownership (and collectively reap the dividends of) any given loan. Loan participation programs can allow all lending participants to share the risks associated with the loan equally, or they can be structured on a senior/subordinate basis to differentially distribute both the risks and rewards associated with the loan to the various lenders managing it.

Banks aren’t the only ones who partake in loan participation programs; credit union service organizations or CUSOs frequently band together to share the ownership of loans in as efficient a manner as possible. A credit union may use a CUSO to engage in loan participation to avoid exceeding regulatory limitations placed upon it by laws such as the Credit Union Membership Access Act . Alternatively, a credit union that holds a risky loan may sell portions of that loan to a CUSO to minimize its exposure to financial risks.

What is Loan Syndication?

Loan syndication entails multiple lenders coming together to fund a large loan for a single borrower. If a would-be borrower needs access to a huge sum of money that an individual lender may not be able to provide by itself, loan syndication can be formed to meet the demand for a hefty loan by pooling the resources of multiple lenders together. Thus, loan syndication allows lenders to collectively issue a massive loan to a needy borrower without individually exposing themselves to the risk of that borrower defaulting on a particularly large loan.

Loan syndications are incredibly important when it comes to financing immense projects that no individual lender may view as safe enough to finance by themselves. It allows bold marketplace actors to embark upon lengthy, risky projects that would likely never materialize if they had to rely on a single cautious lender. If an important client has credit needs that surpass a lender’s established credit exposure limits, loan syndication can allow a bank or CUSO to partially participate in the loan with limited exposure to risks.

Differences Between Loan Participation vs. Syndication

The most critical difference between loan participation vs. syndication is that all lenders partaking in loan syndication will both be involved in the origination and servicing of a loan. On the other hand, in a loan participation program, not all lenders involved will have joint involvement in the origination and servicing of a loan. Many loan participation programs involve an original (or senior) lender who holds onto the original loan documentation and services the loan, while also including a secondary (or subordinate) lender who holds a smaller portion of the loan and is only paid if there are enough funds remaining after the senior lender is paid.

Borrowers themselves may not even know their loan has been participated out by the original lender. In a loan syndicate, however, borrowers will understand from the start that their loan is being sourced from multiple different lenders at once to mitigate financial risks associated with defaulting on a loan. The significant difference between loan participation vs. syndication is thus the role of the lenders themselves. According to the Credit Union Times , CUSOs now play a more important role in loan participation than they did just a few years ago due to heightened demand.

Loan Participation vs. Syndication: Which is Best For Me?

Loan syndication is preferable in expensive cases that may require multiple lenders to finance a single borrower’s loan. Loan participation programs, on the other hand, allow banks and credit unions to mitigate their exposure to risks by distributing portions of their existing loans out to other lenders. Contacting the experts at Extensia Financial can help connect commercial real estate brokers with credit unions interested in participating in lending programs.

The financial professionals at Extensia can explain the fine differences between loan participation vs. syndication while also illustrating which option is the most reliable for any given commercial scenario.

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Loan Participation Note (LPN): What it is, How it Works, Example

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

loan assignment vs loan participation

What Is a Loan Participation Note?

A loan participation note (LPN) is a fixed-income security that permits investors to buy portions of an outstanding loan or package of loans. LPN holders participate on a pro-rata basis in collecting interest and principal payments, and are similarly exposed to a proportional risk of default.

Banks, credit unions, or other financial institutions often enter into loan participation agreements with local businesses and may offer loan participation notes as a type of short-term investment or bridge financing.

Key Takeaways

  • A loan participation note (LPN) allows investors to purchase a claim to a portion of an outstanding loan issued by another lender.
  • With an LPN, the lead bank underwrites and issues the loan, while participant investors subsequently purchase a pro-rata amount.
  • LPNs are popular with credit unions, which use participation agreements to foster greater economic participation and community building through sharing risk & reward with local residents and businesses.

How a Loan Participation Note Works

To meet the needs of local borrowers and increase loan income, many community banks use loan participation agreements in which one or more banks share in the ownership of a loan. Community banks have also formed lending consortia. One example is the Community Investment Corporation of North Carolina (CICNC), an affordable housing loan consortium that provides long-term, permanent financing for the development of low- and moderate-income multifamily and elderly housing throughout North and South Carolina.

One of the purposes of loan participation notes is to help meet the needs of borrowers within a local community. Several other institutions have also sprung up for similar reasons. Credit unions are one such example. A credit union is a financial cooperative that is created, owned and operated by their participants. While some credit unions can be large and national in scale , such as the Navy Federal Credit Union (NFCU), others are smaller in scope.

Cooperative principles of credit unions include: voluntary membership, democratic organization, economic participation of all members, autonomy, education and training for members, cooperation, and community involvement.

Credit unions and banks generally offer the same services, including accepting deposits, originating loans for individuals or small businesses and offering financial products such as credit and debit cards and certificates of deposit (CDs). Key structural differences exist in terms of how a commercial bank and credit union use their profits, however. While traditional banks function to generate profits for their shareholders, many credit unions operate as not-for-profit organizations, putting excess funds into concrete projects that will better serve their community of de-facto owners (i.e. members).

Example of an LPN

For example, Angel V. Castro, a pioneer in the Latin American credit union movement, was recently recognized for his efforts by the National Credit Union Foundation. Castro believed that the traditional U.S. model of consumer credit-based poverty reduction would not fit the needs of the people in the communities he worked with. In Ecuador, he focused on organizing credit unions that extended access to credit for its members specifically for agriculture and other endeavors.

loan assignment vs loan participation

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SYNDICATED LOAN AND LOAN PARTICIPATIONS

Syndicated Loan and Loan Participations

By: Lisa D. Love, Esq., Partner, Love and Long, L.L.P.

Loan syndications and loan participations continue to grow in commercial finance as lenders seek to expand beyond their traditional sources of revenue, enter new or developing markets and industries, maintain acceptable levels of diversification of its investments, and share development risks and credit risks with respect to particular or complex projects, borrowers or industries. Loan syndications and participations also permit lenders to reduce capital weight and provide financial accommodations to valuable clients whose credit needs exceed a lender’s credit exposure limits. These arrangements allow lenders to engage in transactions which might otherwise be prohibited by their lending policies and guidelines. In addition, these arrangements permit lenders to access expertise, business relationships and deal-flow of the arranging lender without having to invest large amounts for marketing costs and administrative capabilities. Although there are benefits to these lending relationship, lenders within a syndicate group give up the day-to-day routine decision making to the lead lender and the flexibility to make decisions independently and take unilateral actions with respect to the loan in favor of group decision making based upon agreed levels of consent. However, the relationship between syndicate lenders and the borrower and participant lenders and the borrower are usually very different.

A syndicated loan is a loan made respectively by two or more lenders contracting directly with a borrower under the same credit agreement with the lenders dividing the responsibility to lend the full amount of the loan. Each lender has a direct legal relationship with the borrower and receives its own promissory note from the borrower. Typically, one or more lenders will also take on the separate role as arranger of the loan and as agent for the credit facility and will assume responsibility of administering the loans for all lenders, including collecting loan payments and fees made under the notes and distributing to each syndicate lender its respective share. The arranger and agent are able to increase its profitability by receiving additional fees and compensation for such services. A syndicated loan differs from loan participation in that the lenders in syndication participate jointly in the origination and the lending process.[i]

A loan participation involves a sharing or selling of ownership interests in a loan between two or more financial institutions. Normally, but not always, a lead bank originates the loan, closes the loan and then sells ownership interests to one or more participating banks. The lead bank retains a partial interest in the loan, holds all loan documentation in its name, holds all original documentation, services the loan and deals directly with the borrower for the benefit of all participants. Participations can either be made on a pari passu basis with equal risk sharing for all loan participants, or on a senior/subordinated basis, where the senior lender is paid first and the subordinate loan participation is paid only if there is sufficient funds left over to make the payments. Such senior/subordinated loan participations can be structured either on a LIFO (Last In First Out) or FIFO (First In First Out) basis.[ii] The participation agreement will also include the terms of the arrangement to include profit sharing among the lenders, loan fee sharing, standard of care the lead lender or administrator owes to the participants, and the responsibilities of the participants. In many cases, the borrower may not even know that the loan has been participated out to other lenders.

With participations, the contractual relationship runs from the borrower to the lead bank and from the lead bank to the participants, whereas with syndications, the financing is provided by each member of the syndicate to the borrower pursuant to a common negotiated agreement with each member of syndicate having a direct contractual relationship with the borrower. Some other key provisions to negotiate in syndicated loans and participation agreements include assignments, enforcement actions, amendments and workouts, waiver rights, decision-making, information and notice rights, liability and standard of care on agent or participating lender, default and payment priorities, co-lender and participant defaults provisions, each of which can have a significant impact on the co-lender and participants.

As the attractiveness of loan syndications and loan participations continue to increase, lenders and their counsel must be familiar with the legal issues surrounding such transactions. Specific attention must be given to the various key terms described above and the negotiation of such terms to the benefit and best interests of your client.

[i] Federal Deposit Insurance Corporation, Risk Sharing Asset Management Guidance RSAM-2011-15

Lisa D. Love is an attorney concentrating in corporate finance, project finance, equity financing and secured transactions (including loan syndications and loan participations). She has served as counsel to the United States Department of Treasury, financial institutions, quasi-public and private development entities, Fortune 100 companies and other corporate entities. She is currently the co-chair of NAMWOLF’s Transactional Practice Area Committee and a member of NAMWOLF’s national board of directors.

BankLabs

What is a Participation Loan?

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Many banks looking to retain valued customers, but are nearing their lending limit, turn to loan participations as a way to diversify and mitigate risk. There are many reasons why both originators and participants choose to partake in loan participations. We will explore a few of these below.

Benefits of Participation Loans

The lead bank can retain control of a significant amount of customer relationship by selling loan participations. By selling the participations, a bank can remain within its legal lending limits while still coming up with sufficient funding. The banks that buy the participations share in the profits. Consequently, these loans are an excellent way for smaller lending institutions to team up with several other banks looking to put their excess liquidity to work.

The borrower may choose to manage the loan participations in-house, which can take a significant amount of staff time and resources. If the buyer manages the loans manually using spreadsheets, they must take into account staff time, additional training, reporting requirements, and other costs. If the buyer chooses to use loan participation automation software, significant savings in time and money can be realized. Always look into the fees associated with a loan participation platform, most are minimal.

Loan participations require quality resources and partners. However, due diligence is essential for success. While a participation loan may be riskier than a traditional loan, a well-planned and documented due diligence process will help avoid this. If banks want to participate in a loan, they should ensure that the originating institution meets their credit standards. This is because the risk is spread among many lenders.

Banklabs has streamlined the process and made participations more accessible to both originators and participants. By requiring diligence documentation directly on the platform, Banklabs has significantly reduced the transaction costs associated with loan participations. Banklabs also enables more participants to enter the participation market and make participations more useful to banks and credit unions. Its forward flow system allows visibility of loan supply and demand. This transparency has made participations an effective tool for diversifying portfolios.

Participation loans offer a variety of benefits for banks. In addition to reducing the risk to the borrower, they allow participating institutions to increase liquidity and capacity. They can also extend their geographic reach by taking on new participation loans they previously did not have access too. However, they come with additional risks and should only be undertaken after careful research. 

The primary factor in determining the success of participation loans is matching the risk to the quality of the loans in the portfolio. Lenders should only participate in loans that meet their own standards, and they should never assume that the quality of the loans offered by other parties will be satisfactory. Participation loans can be an easy way to diversify a lender’s portfolio and manage a balance sheet.

A participation loan can also be beneficial to financial institutions that buy and sell loan portfolios. This is an excellent way to diversify an institution’s portfolio and reduce risks associated with high-risk customer or community segments. The process also allows the lead financial institution to maintain control of a critical customer relationship. Further, the benefits of a participation loan are often based on the resulting revenue and increased liquidity. For this reason, many financial institutions are turning to participation loans as a low risk way to put access liquidity to work.

Repayment terms for Participation Loan

Participation agreements require participating banks and credit unions to share information about the Borrower. These documents detail the accrual status of loans, financial statements of Borrowers in the Bank’s possession, and any other credit information the bank or credit union receives pursuant to the Loan Documents. Participants must monitor loan quality on an ongoing basis and obtain timely information from relevant sources. The analysis of loan participation quality should capture trends in several areas. One great benefit of using BankLabs Participate to monitor participations loans is that all documents and loan information are stored in one place, giving you an easy and accurate, real-time snapshot of your loans, without back and forth emails. This is especially convenient for internal reporting and audits.

Repayment terms for participation loans vary by agreement and lender. Loans with participation agreements generally require interest-only payments while others require principal and interest payments. A loan participation tool like BankLabs Participate can help keep every party involved on the sale page throughout the life of the loan by having up to date details available 24/7. Greater transparency can help avoid many problems that are found in the traditional, slow, manual lending process.

Participation loans can help credit unions diversify risk by providing additional sources of income. Nonetheless, the risks associated with participation loans should be analyzed and documented by individual credit unions. As a result, credit unions should ensure that the lending practices of their partners align with their own policies and controls. This can help them ensure adequate revenues and minimize unexpected losses. Further, loan participation agreements should include a comprehensive participation agreement. BankLabs Participate provides a standard agreement that most financial institutions on the system today use, but also provides the option to upload and use your own digital agreement, if needed.

Purposes of Loan Participation

In addition to helping communities achieve economic development, participation loans can reduce a bank’s risk exposure by helping that bank diversify its asset base. These loans also allow the originating bank to retain control of an important customer relationship without sharing it with a competitor. To the borrower, the originating bank is still “their bank” and retaining valuable customers is increasingly important in today’s lending climate. Listed below are some reasons why banks should consider selling loan participations.

A participation loan is an agreement in which one or more lenders participate in the financing of a particular loan. While the other lenders are merely investors who purchase shares of the loan, the originator retains control of the loan and manages the relationship with the borrower. It is responsible for originating the loan, dealing with communication with the borrower, and servicing the loan itself. One of the great benefits of using a loan participation tool like Participate is that all of the back and forth communication is automated for you. All participating parties get notifications when action needs to be taken or when repayment or other important updates have been made to the loan.

A primary factor for participation’s success is matching quality with risk. Lenders should only participate in loans they would make themselves, and should not evaluate the standards set by the participating lenders carefully. It is best to limit the number of participation loans from one lender to ensure a balance of risk and reward. Participation loans can also help institutions extend their geographic reach by leveraging their expertise and relationships with other lenders. 

Getting a participation loan

Many banks who already participate in loans do so with a small group of trusted partners. The same banks they have always conducted participations with. While this is great, it does create a barrier for new trading partners, and limits the originating bank’s ability to realize new options. BankLabs Participate hosts a Marketplace to help democratize the lending process by providing originators with new trading partners, if desired. By opening up options beyond their usual circle of participants, many banks are able to fund their loans faster, and with added diversity, mitigating risk.

Conversely, many banks who are dedicated participants for a single originating bank can now broaden their diversification by having access via the Marketplace to new loan options. Maybe these new options are different lending sectors, or maybe they are new geographical regions that the participating bank did not previously have the opportunity to work with. Either way, this is a win-win for both originator and participant. 

Selecting Participating Institution

When selecting a participating bank, consider the benefits and risks involved. The principal factor in successful participation loans is matching the quality of the loans with the level of risk in the portfolio, and managing your balance sheet to your institutions comfort level and standards. Make sure you choose participating institutions that offer loans that you would be comfortable making. Also, limit the number of loans from a single lender or industry – take the opportunity to diversify your portfolio to balance your risk.

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loan assignment vs loan participation

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IMAGES

  1. Loan Participation Vs Assignment

    loan assignment vs loan participation

  2. Loan participations

    loan assignment vs loan participation

  3. Loan participations vs. syndications: What’s the deal?

    loan assignment vs loan participation

  4. Loan participations vs. syndications: What’s the deal?

    loan assignment vs loan participation

  5. Mortgage Loan Assignment: The What, Why, and How Of It

    loan assignment vs loan participation

  6. The great divide on loan participations

    loan assignment vs loan participation

COMMENTS

  1. Loan Participation Vs Assignment

    However, the basic difference between participation and assignment is that the former involves the original lender continuing to manage the loan while the latter takes on the responsibility of doing so. As a rule, loan participation is a good option if the original lender does not want to keep the title of the loan.

  2. Loan Participation or Assignment; What's the Difference

    Generally, an assignment is the actual sale of the loan, in whole or in part. The assignee is now the owner of the loan (or the part assigned) and is considered the lender under the loan agreement. A participation, on the other hand, means that the original lender maintains ownership over the loan and the participant has only a contract right ...

  3. Assignments and Participations of Loans

    A Practice Note discussing assignments and participations of loans. This Note outlines the differences between the two transactions and discusses key issues in assignment and participation clauses in loan agreements.

  4. Six Key Points on Loan Participations

    Lenders can sell interests in loans to other parties by assignments or participations. Each of these arrangements has different characteristics. PLC Finance examines six key points about loan participations and draws comparisons between participations and assignments. Point One: Privity

  5. Loan participations vs. syndications: What's the deal?

    Loan participations and loan syndications are terms often interchanged to describe a lending arrangement involving more than one lender; however, for accounting and reporting purposes, these are two different types of transactions with unique considerations and issues.

  6. Financial Innovation: Recent Changes to Loan Participations

    The recent financial innovation rule made one particularly notable change with regards to loan participations. FICUs often engage in "indirect lending" relationships, in which they work with a third-party to facilitate transactions with new borrowers - for example, many credit unions may work with an auto dealership, who will partner with ...

  7. 2.3 Entire vs. portion or component of a financial asset

    The legal characteristics of a typical loan assignment and a loan participation and their potential implications on the transfer accounting assessment, are discussed in the following sections. 2.3.1.1 Assignments of loans. Loan assignments typically involve loan agreements with multiple lenders (syndicated loans). The loan agreement frequently ...

  8. Loan Participations, the Participation Structure, and its Benefits

    Participation arrangements can be a powerful tool for institutions on either side of the transaction - sellers can free up capital on their balance sheet, pare back funding obligations and reduce...

  9. Six Key Points on Loan Participations

    Most participations are non-recourse to the bank selling the participation, which makes it all the more important for a would-be participant to conduct due diligence on the borrower and the loan (see Standard Document, Participation Agreement: Drafting Note, Non-recourse Participation).In practice, however, a participant may carry out less extensive due diligence than the originating lender.

  10. Syndicated Loans: Overview

    157,000 hours spent in 2021 maintaining and updating resources. Learn more and shop plans. An overview of syndicated loans, including the types of commitments, who makes the commitment, the parties to a syndicated loan, the syndication process and assignments and participations.

  11. Assignments and Participations of Loans

    Assignments and Participations of Loans. A Practice Note discussing assignments and participations of loans. This Note outlines the differences between the two transactions and discusses key issues in assignment and participation clauses in loan agreements.

  12. Assignment, Novation Or Sub-participation Of Loans

    The transfer of loans may be carried out in different ways and often involves assignment, novation or sub-participation. A typical assignment amounts to the transfer of the rights of the lender (assignor) under the loan documentation to another lender (assignee), whereby the assignee takes on the assignor's rights, such as the right to ...

  13. 3.6 Loan syndication and participation

    The new loan syndication is prepayable at any time without penalty; therefore, to determine the cash flows of the new loan syndication, FG Corp would assume prepayment at the modification date and calculate the new loan syndication cash flows as the sum of (1) the change in principal balance, (2) the new lender fees, and (3) the repayment of ...

  14. Loan Sales and Participations

    A loan participation is a sharing or selling of interests in a loan. Depository institutions use loan participations as an integral part of their lending operations. Banks may sell participations to enhance their liquidity, interest rate risk management, and capital and earnings. They may also sell participations to diversify their loan portfolio and serve the credit needs of borrowers.

  15. The Loan Settlement Waterfall And Why "Legal Transfer/Assignment Only

    "Legal Transfer Only" (LMA) or "Assignment Only" (LSTA): if "Legal Transfer Only" or "Assignment Only" (as applicable) has been selected by the parties, it is agreed that the trade will settle by way of legal transfer or assignment; however, if any required consent or other transaction specific condition is not satisfied, rather than settlement ...

  16. Worldwide: Assignment, Novation Or Sub-Participation Of Loans

    A typical assignment amounts to the transfer of the rights of the lender (assignor) under the loan documentation to another lender (assignee), whereby the assignee takes on the assignor's rights, such as the right to receive payment of principal and interest on the loan.

  17. How are assignment and participation treated?

    An " assignment " under New York law is the legal term used to refer to the transfer of rights, such as the right to receive payments on a loan, while "delegation" is the legal term used to refer to the transfer of obligations, such as the obligation to make loans .

  18. Loan Participation vs. Syndication: What's the Difference

    Differences Between Loan Participation vs. Syndication. The most critical difference between loan participation vs. syndication is that all lenders partaking in loan syndication will both be involved in the origination and servicing of a loan. On the other hand, in a loan participation program, not all lenders involved will have joint ...

  19. Loan Participation Note (LPN): What it is, How it Works, Example

    Loan Participation Note - LPN: A fixed-income security that permits investors to buy portions of an outstanding loan or package of loans. LPN holders participate, on a pro rata basis, in ...

  20. SYNDICATED LOAN AND LOAN PARTICIPATIONS

    A loan participation involves a sharing or selling of ownership interests in a loan between two or more financial institutions. Normally, but not always, a lead bank originates the loan, closes the loan and then sells ownership interests to one or more participating banks. The lead bank retains a partial interest in the loan, holds all loan ...

  21. What is a Participation Loan?

    A participation loan is an agreement in which one or more lenders participate in the financing of a particular loan. While the other lenders are merely investors who purchase shares of the loan, the originator retains control of the loan and manages the relationship with the borrower. It is responsible for originating the loan, dealing with ...

  22. What is the difference between loan participations and loan assignments?

    VIDEO ANSWER: What is the difference between loan participations and loan assignments? Get 5 free video unlocks on our app with code GOMOBILE Invite sent!

  23. Loan Participation Vs Assignment

    The terms "loan participation" and "assignment" are often used in the banking industry. Both terms referral to who transfer of a loan's rights and payments between two financial institutions. We'll look at what each concepts method and whereby they differ from each other. What Loan Servicers Do.

  24. LOAN PARTICIPATION ASSIGNMENT

    Section 1. Assignment and Assumption. 1. (a) Participant does hereby contribute, assign, and transfer to Assignee (i) all of its right, title and interest in and to the Participation Interest, subject to the terms and conditions of the Participation Agreement, and (ii) all of Participant s rights and obligations under the Participation ...