What is a Loan Participation?

Share on linkedin
LinkedIn
Share on facebook
Facebook
Share on twitter
Twitter
Share on email
Email

In a loan participation, two or more banks fund one loan to a customer. The lead bank makes the loan and then sells a portion to at least one participating bank.

Loan Participations & Legal Lending Limits

A loan participation can enable a lead bank to approve loans that, under normal circumstances, would be above its legal lending limit—the maximum amount that a financial institution can loan directly to a customer. Legal lending limits are set by regulatory bodies and are in place to manage bank risk.

For example, if a financial institution receives a loan application above its legal lending limit, it may solicit other banks to “participate” in the loan. A lead bank’s loan presentation to a potential participating bank would normally include information such as:

  • Amount loaned by the lead bank
  • Collateral value
  • Appraisals

The prospective participating bank then determines whether or not to approve the offer. If it does, the participating bank must fund its portion when the loan closes so that the lead bank is never over the legal lending limit with that borrower.

Lead Bank Responsibilities on a Loan Participation

Loan participation administration can become complicated for lead banks. Not only do these financial institutions issue participating banks their pro-rata shares of incoming loan payments, but lead banks also bear the burden of ongoing due diligence. They are required to send copies of pertinent documents as they acquire them to participating banks. These include the recorded deed of trust/mortgages, as well as updated financials, tax returns, and other documents. Some loan management systems, such as AccuAccount, provide loan participation features that automatically send new items to participating banks.

In the event of loan foreclosures, lead banks invoice participating banks for their share of legal fees and then distribute pro-rata shares of the net proceeds from sale of the collateral.

Additional Loan Management Resources

Looking for more information about loan management in the banking industry? Be sure to check out our extensive resource library with free spreadsheets, whitepapers, and ebooks.

Browse our banking definitions page for more terminology.

Free Downloads

Bank auditor who is sitting at a desk and reviewing financial statements

Banks Audit & Exam Prep Study

[Study] Banks Audit & Exam Prep Learn how 187 other community bankers manage audit and exam prep. What’s Covered in this Summary Report? AccuSystems recently conducted a survey of 187 banking professionals, representing over $70 billion in combined assets at

Download for Free »
Desk that contains a laptop with the TicklerTrax spreadsheet

TicklerTrax Exception Spreadsheet

TicklerTrax™ Exception Spreadsheet Downloaded 1,000+ Times Looking for a free spreadsheet to track your financial institution’s exceptions? TicklerTrax might be the perfect tool for you! We’ve taken some of the basic logic from our top-rated document tracking system and boiled it

Download for Free »
Banker's desk that contains a stack of documents, a computer, and smartphone

eBook: Compliance & Bank Document Management

[eBook] Compliance & Bank Document Management Compliance is a tricky subject – especially when your financial institution is reliant on paper documents and manual tickler systems. In this free eBook, published by technology company, AccuSystems, you’ll encounter three compliance-related situations

Download for Free »

Related Articles