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Loan participations paper offered by lending council
MADISON, Wis. (9/17/10)--Loan participations can be a lifeline for credit unions, according to a new white paper from the CUNA Lending Council. The council’s paper, “Loan Participations,” discusses the benefits of loan participations, which means borrowers share loan risks and rewards. Loan participations can be a source for selling loans to keep under the 12.25% business lending cap, offer geographic and loan type diversification, and yield three times the amount of the average investment. But while loan participations have benefits, there are drawbacks. If a loan fails, the losses are shared, the paper said. The paper examines business models using loan participations, a sample policy, board questions, regulatory oversight information and information on finding a partner. A credit union board, in its role as watchdog, needs to decide whether management has a thorough understanding of the risks, underwriting policies, pricing and terms of each loan, whether the loan is for member business real estate or construction lending. Managing the participation loans requires a calculated approach from experienced lending staff. The loans require constant oversight because market risk and credit risk change over the loan term, the paper added. For more information, use the link.
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