Loan participations have become important tools for credit unions to consider. When properly executed, loan participations tend to boost lending and increase “profits” during low loan demand.
According to some recent reports from NCUA, nearly 1,500 federally insured credit unions have reported activity in loan participations with total balances of nearly $13 billion.
The NCUA requires that those credit unions involved in loan participations enter into a written master participation agreement.
However, the NCUA has not provided any guidance as to what should or should not be included in the master participation agreement.
The following are some suggested contract issues that should be considered as part of the due diligence analysis of a loan participation loan.
1. Identification of roles and responsibilities of all parties involved
2. Verification that all parties have performed independent financial analysis
3. Requirement that each loan participant has reviewed the loan documents prior to closing
4. Identification of loans sold with and without recourse
5. Guarantors, if any, identified and appropriate due diligence
6. Attention to servicing issues
7. Buy-back rights
8. Notice provisions
9. Servicer rights, including fees, delinquencies, right to modifications
10. Privacy and confidentiality issues
11. Broker's rights and responsibilities/payments
12. Voting rights
13. Custody of loan documents
14. Separate trust accounts for funds
15. Statutory liens
16. Prepayment penalty
17. Defaults
E. Andrew Keeney is a Norfolk, Va.-based credit union attorney with more than 35 years of experience.
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