What is a Loan Participation?
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
Banks Audit & Exam Prep Study
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
eBook: Compliance & Bank Document Management
Related Articles
“No, I Don’t Have That File”
Lisa: “Hey Tony, I’d like to borrow a loan file that you checked out. The customer is here, and I need to review a few things in his file.” Tony: “What loan ...
5 Pillars of an Effective Bank Document Tracking Strategy
Document tracking is sometimes viewed as a back-office function that deserves minimal strategic thought. Banks that hold this opinion tend to struggle with inef ...
Beehive Federal Credit Union Adopts Document Imaging with AccuAccount
We’re pleased to announce that Beehive Federal Credit Union has chosen AccuAccount for the document management needs of its commercial loan portfolio. Beehive F ...
The Definitive List of Bankers’ Banks
Thanks to community banks, consumers in the U.S. have an almost unparalleled number of options when deciding who they’re going to trust with their money: some 1 ...
3 Reasons Why Imaging is a Must for Banks in the COVID-19 Era
The coronavirus pandemic has impacted almost every aspect of life—and banking is no exception. Practically overnight, bankers across the country were thrust int ...
How to Spread Financial Statements Faster with Better Data Collection
Your financial institution has made a significant investment in its financial monitoring workflow. The latest credit spread software and a well-trained credit a ...
Bankers Online: What Is It?
Bankers Online (“BOL”) is a popular website that provides helpful content, tools, and resources for professionals who work at banks, credit unions, and related ...
5 Types of Commercial Loan Software
Commercial lending is a unique aspect of the banking industry. Unlike consumer loans, which are underwritten based on a snapshot of the customer’s current cr ...
